Exchange Traded Funds, also known as ETFs are a basket of securities merged into one and sold on stock exchanges globally. ETFs exist across all asset classes so you could have an ETF consisting of commodities, stocks, currencies etc. They are basically a way of having your hand in different pots but being able to acquire all these pots for one price, at the same time. My little analogy is basically one for diversification. An idea that you’ll hear over and over within Bloomberg, lecturers or amongst Asset managers and its simply the idea of lowering the risk associated with share/commodity price swings by investing in a variety of shares, across different sectors or commodities in different industries I.e. copper for electricity cables, Oranges for consumption. However, in this case I will be focussing on stocks. It ensures that when one particular stock, in a given industry is down, one stock in another industry could be up and so they sort of cancel each other out, which essentially protects from risk of greater losses and could potentially lead to greater returns if three or four industries are performing well at the same time for example. Now, why am I going over ETFs? Some of you might be thinking I could individually just buy my own shares in different industries without buying an ETF and I would be just fine. That is true! You are ready to invest my friend! However, ETFs are usually seen as being a more cost-effective way of investing particularly amongst passive investors.
My particular focus on ETFs is in an area that I love to read about and monitor on the news as I feel it’s one of the most exciting things about stock exchanges. An initial public offering or ‘IPO’ is the day in which a company lists on an exchange for the very first time. Majority of the time, this is a day when the company will raise the most money on a single day of trading and usually makes for some interesting numbers whenever a company lists. Recently Uber had placed an IPO on the New York Stock Exchange (NYSE) raising $82 billion on the day (What followed was tragic as the share price fell over 7% in the next couple of days post IPO but this is for another day). Now one thing that people struggle with (especially retail investors) is being able to buy shares in companies that are seeking to list as they may not necessarily track IPOs actively. Thus, bring forth ‘IPO-focussed ETFs’ which are basically what it says they are. As 2019 has been a year for IPOs particularly within the car hauling industry (Lyft and Uber both listing) as well as the likes of Pinterest, Zoom, Airbnb and Saudi Aramco all looking to list, seeking opportunities to buy into IPO ETFs are one of the ways to seek gains in the market.
A number of ETF IPOs have performed well with one known as the First Trust US Equity Opportunities ETF (ticker: FPX US) outperforming the S&P500 and Russell 3000 over the last 10 years in terms of annual average returns, according to an article by ETF Strategy. This ETF tracks the IPOX 100 US Index, which consists of the 100 largest US stocks in the IPOX Global Composite Index. The relevance to IPOs is the fact that this ETF tends to capture companies 6 days after their listing and holds these for four years which gives investors exposure to all the potential upside after the initial listing. At the end of the day, IPO ETFs present an alternative strategy to adopt in investing that should be looked at as a route to expose yourself to a variety of stocks which isn’t a bad thing to do, unless you’re Michael Burry of course! Cheers
Disclaimer: Do not take any of the opinions shared here as Investment advice. Whenever you want to start investing make sure you do your own research and seek professional advice for any investment decisions you make in the future. Hope you enjoyed the read!
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