ETF du Jour: IPOX-100 sets sail

They’re throwing yet another log onto the ETF fire this morning when yet another fund tracking yet another index that hardly anybody’s heard of starts trading at the future condo development on Trinity Place. Putting aside the 60% expense ratio – which seems a little excessive, but may be a typo (left, click for legible image) – the First Trust IPOX-100 (FPX) will track the performance of the biggest US IPOs.

As an index, it’s kicked the living daylights over the S&P 500 over just about any time period you care to choose, turning in 24.5% in 2005 and a mere 8.22% so far this year. As an investment, it would be an interesting candidate for a long-term cost averaging play – an investment on Dec 31, 1999 was still underwater at the end of 2005 – but as a trade? Well, knock yourself out.

Certainly one of the most annoying aspects of the product is that it is one of those disciplined, totally transparent, rules-based blah blah blah but good luck tracking down a clear explanation of what those rules are. As near as can be figured from the website of the index provider, IPOX Schuster LLC:

• IPOs come into the IPOX Composite at their seventh trading day after going public and automatically exit after 1000 days, or roughly four years trading. Admission is, however:
• “Subject to satisfying size, float and certain initial trading characteristics.” Among those initial trading characteristics: IPOs that rise more than 50% on their first day are excluded.
• The IPOX US-100 is a subset of the IPOX Composite and is adjusted quarterly. Weightings are capped at 10 percent in the US-100 as well as the other IPOX subsets: The US-30, and the Europe-100 and Europe-30. Those sets seek “to be a comprehensive representation of the well-performing and most liquid universe of the largest IPOs.”

The provider’s thesis is that IPOs “bare unique return dynamics” including “short-run IPO overperformance, a highly skewed long-run return distribution with few companies driving positive performance, significant return differences when measuring IPO returns of sub-groups of companies or the link between pre-IPO accruals management and long-run stock price performance.”

Fine, but the IPO business is a very cyclical game, as that 55 percent decline in the 2000-2002 timeframe clearly demonstrates. And call me a cynic, but other people’s castoffs and/or restructurings – Viacom (8.8%), Genworth Financial (4.7%), Seagate (3.5%), Ameriprise Financial (3.4%), CIT Group (3.2%), and Clear Channel Outdoor (2.3%) – are prominent in the Top 10 holdings, which account for over 40% of the index. Among the other names, the Chicago Mercantile Exchange – which surely is one of those “few companies driving positive performance” – will be coming out later this year although Google, at 10%, will be around until 2008.

Want to know more?
First Trust IPOX-100 US fact sheet
The IPOX Weekly Indexes Update, and
A reprint from The Wall Street Journal More IPO entryways for small investors including the customary ETF-launch sliming from Mansuetoville:

...“I’d rather have an active manager who can go in and pick the winners because it seems to me typically there’s only one in five [IPOs] that are really worth investing in,” says Russ Kinnel, director of mutual fund research at investment research firm Morningstar...

...Kinnel says investors interested in young companies are better off buying small-cap growth funds with decent track records that “find good young companies that are attractive investments whether they buy in at the offering or not.”

Putting aside the fact that the IPOX-100 doesn’t buy in at the offering, and the other fact that as a multi-cap product that invests in IPOs, rather than “young companies,” the IPOX-100 is more diverse than small-cap growth funds...oh, I give up. Again.