Below excerpt courtesy of Oct 24 IndexUniverse column re: The Renaissance IPO ETF, the newest entrance to the ETF market place, and tracks a market-cap-weighted index of recent US-listed IPOs. The fund acquires issues within 90 days or sooner after IPO and sells after 2 years.
“..The reason it (IPO) traded to a premium, most likely, is that the sole AP for the fund, Knight Capital [aka KCG] was caught off guard. The underlying stocks are plenty liquid, so there’s no reason to think Knight couldn’t make more shares, and obviously, with $31 million now in the fund, Knight indeed made more shares in a hurry. So the premium present in that first day’s trading was entirely irrational, and predictably collapsed. To anyone who bought at that irrational price, all I can offer is my condolences. And perhaps a reminder that, in the end, fair value always wins. ..” Dave Nadig, IndexUniverse
Since the 2009 inception of the index IPO tracks—the Renaissance IPO Index—it’s returned an average annual return of 19.09 percent, just a touch over the Russell 3000’s return of 18.97 percent. Add in the effect of a 60 basis point management fee and it’s easy to be skeptical about whether the long-term returns will really play out for investors.
But that cautionary note seemed to be lost on the markets when IPO launched. In the first day of trading, IPO traded more than 800,000 shares. That’s a big day for a new niche ETF.
Unfortunately, the folks who were trading during that initial feeding frenzy caused an irrational “IPO pop” of their own.