The IPO Market is Booming, and an ETF Tracks New Stocks is on the Rise

Wall Street is showing renewed interest in new stocks, bolstering an exchange-traded fund (ETF) that tracks some of the most prominent entrants over the past three years.

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During the market downturn and surging interest rates last year, the IPO market came to a standstill. However, the market's resurgence in 2023 is sparking demand for new offerings. Notably, Cava Group and Oddity Tech experienced significant rallies during their debuts this summer, and secondary stock offerings raised tens of billions in the second quarter, according to Dealogic.

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Investors are displaying increased confidence in less-established stocks, as evident in the performance of the Renaissance IPO ETF (IPO), which has surged 41% year to date.

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The ETF's unique approach involves rebalancing every three months and including the largest publicly traded stocks by market cap from the past three years, provided they meet other criteria, such as liquidity. The ETF tracks a custom index from Renaissance Capital and FTSE Russell. Consequently, the fund holds some of the largest companies that are not yet included in other prominent indexes like the S&P 500.

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Avery Spear, Senior Data Analyst at Renaissance Capital, highlighted the diversification benefits of the fund, stating that successful companies with larger market caps are included, resulting in exposure to the best names in the portfolio.

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While ETFs provide retail investors with access to IPOs, the Renaissance fund does not directly participate in IPOs. Consequently, it may not capture the initial day "pop" often observed in new offerings, which sometimes accounts for the majority of a stock's positive return in its first year on the market. As a result, the fund does not currently hold Cava, which went public in June.

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The fund does not impose industry-specific concentration limits but does cap individual stock weightings at 10% during each rebalance. Presently, the largest holding is Airbnb, which has appreciated to a weight above 11%.

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Spear pointed out that the fund currently exhibits a tech-heavy allocation, which is understandable considering the prominence of big tech IPOs in 2021. However, the fund has mechanisms to control exposure to any single name beyond 10%.

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Although the fund was launched in 2013 and has seen significant growth this year, it still manages less than $300 million in assets, with $55 million in net inflows so far in 2023. The expense ratio for the fund is 0.60%.

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