IPO ETFs: How First-Trust IPO and Renaissance IPO ETFs Track New Issues

How IPO ETFs Select and Weight Holdings

The Renaissance IPO ETF (IPO) uses a market-cap-weighted index of the 100 largest US IPOs, with a maximum weight cap of 10% per holding to reduce single-stock concentration. The ETF holds stocks for up to 1,000 trading days (approximately 4 years), after which the stock is removed from the index. New IPOs are added at each quarterly rebalance, typically 5-15 new names per quarter. The First Trust FPX ETF uses a modified equal-weight methodology, weighting holdings based on a composite score of market cap, revenue growth, and liquidity. FPX holds approximately 100 stocks and also rebalances quarterly. The key difference is that FPX includes SPACs (special purpose acquisition companies) and companies that went public via direct listing, while Renaissance IPO excludes SPACs. The holding period cap of ~4 years means these ETFs naturally rotate capital from mature IPOs to newer ones, maintaining a portfolio of relatively young public companies.

The First-Day Pop Problem

The most significant structural disadvantage of IPO ETFs is that they cannot capture the first-day pop. When a company goes public, the first-day price surge (which averaged 15-25% in 2020-2021) goes to IPO allocation holders — typically institutional investors and the company's early backers. IPO ETFs buy shares on the second day of trading or later, meaning they miss the initial pop entirely. This creates a systematic drag: IPO ETFs consistently underperform the average first-day return of the IPOs they track. According to research by Jay Ritter, the average first-day return for US IPOs from 1980-2024 is approximately 18%. An IPO ETF that buys on day 2 starts with a ~15% structural disadvantage relative to the IPO pricing. Over time, this structural drag compounds into significant underperformance compared to a hypothetical index that captures IPOs at the offer price. The Renaissance IPO ETF has underperformed the IPOX-100 Price Return Index by 2-4% annually due to this effect plus fees and trading costs.

Why Most IPOs Underperform the Market

Academic research consistently shows that IPO stocks underperform the broader market in the 3-5 years following their public debut. Studies by Loughran and Ritter (1995, 2000) found that IPO stocks underperform matched non-IPO stocks by 3-5% annually over a 3-year horizon. This IPO underperformance phenomenon has several explanations. First, companies time their IPOs to coincide with peak valuations and market sentiment (market timing hypothesis). Second, the first-day pop leaves little upside for subsequent buyers, creating a negative expected return from day 2 onwards. Third, IPO companies often have unproven business models, high cash burn rates, and elevated insider selling post-lockup. Fourth, the lockup expiration (typically 180 days after IPO) creates a wave of insider selling that depresses prices. These factors combine to make IPO ETFs a problematic long-term hold — they are structurally tilted toward companies that, on average, underperform the broad market after going public.

Renaissance IPO ETF vs. First Trust FPX

The Renaissance IPO ETF (IPO, ER 0.60%) and First Trust FPX (FPX, ER 0.59%) have similar expense ratios but differ in methodology. Renaissance IPO is market-cap weighted with a 10% cap per holding, while FPX uses a modified equal-weight methodology. Renaissance IPO excludes SPACs and direct listings, while FPX includes them. Over 5-10 year periods, the performance difference has been modest (1-2% annually), but FPX has shown slightly lower volatility due to its equal-weight approach. Renaissance IPO has higher concentration in mega-cap IPOs (like Snowflake, Airbnb, Uber), while FPX spreads exposure more evenly across mid-cap and large-cap names. Both ETFs tend to have high turnover (50-100% annually) as IPOs are added and removed each quarter, generating trading costs and potential capital gain distributions. For investors seeking IPO exposure, the choice between IPO and FPX depends on preference for market-cap vs. equal-weight and whether you want SPAC inclusion or exclusion.

Are IPO ETFs a good investment for long-term investors?

IPO ETFs are generally not suitable for long-term buy-and-hold investors. Academic research shows IPO stocks underperform the market by 3-5% annually in the first 3 years. The first-day pop problem means IPO ETFs buy at inflated prices relative to the offer price. The high turnover (50-100% annually) generates trading costs and tax-inefficient short-term capital gains. Most IPO ETFs have underperformed the S&P 500 over their lifetimes. Since its 2013 inception, the Renaissance IPO ETF has returned approximately 8% annualized vs. 12% for the S&P 500. For long-term investors, the S&P 500 or total market index funds provide superior risk-adjusted returns. IPO ETFs are more appropriate as tactical tools for investors with a specific view on new-issue market cycles — buying when IPO activity is low (post-crash) and selling when IPO activity peaks.

What is the best way to invest in IPOs?

The best way to invest in IPOs depends on your access and risk tolerance. For institutional investors and high-net-worth individuals, getting IPO allocations directly through underwriters at the offer price is the most profitable approach — capturing the first-day pop. For retail investors, IPO ETFs provide diversified exposure to the new-issue market without single-stock risk. A better approach may be to wait 6-12 months after an IPO, when the lockup period ends and insider selling creates a more attractive entry point. Individual IPO stock selection is high-risk — studies show that 60% of IPOs trade below the offer price 3 years after listing. For most investors, Renaissance IPO ETF or First Trust FPX with a small tactical allocation (2-5% of portfolio) is the most prudent way to gain IPO exposure, combined with a stop-loss plan if the IPO market cycle turns.

How are IPO ETFs taxed?

IPO ETFs have relatively high tax drag due to their frequent rebalancing and high portfolio turnover (50-100% annually). When IPOs are held for less than one year (which is common given the quarterly rebalancing), gains are taxed as short-term capital gains at ordinary income rates. The funds distribute significant short-term capital gains each year. For tax efficiency, hold IPO ETFs in tax-advantaged accounts (IRA, 401k) rather than taxable accounts. The turnover also generates transaction costs (bid-ask spreads, brokerage commissions) that reduce net returns by an estimated 0.20-0.40% annually beyond the stated expense ratio. The total cost of owning an IPO ETF (ER + trading costs + tax drag) can approach 1.5-2.0% annually for taxable accounts, significantly reducing the already modest expected returns.

What happens to IPO ETFs during a market downturn?

IPO ETFs are among the worst performers during market downturns because they hold recently public companies with high valuations, limited profitability, and elevated volatility. During the 2022 bear market, the Renaissance IPO ETF fell 50% vs. 25% for the S&P 500. IPO ETFs have a beta of approximately 1.5-2.0 against the S&P 500, meaning they amplify market declines substantially. The reason is that IPO stocks tend to be held by momentum-driven investors who sell quickly in downturns, and these companies often have negative earnings, making them particularly sensitive to rising discount rates. During recessions, IPO activity historically dries up, and existing IPO ETFs can experience forced selling from redemptions, further depressing prices. Investors considering IPO ETFs should have a high risk tolerance and plan to hold through significant drawdowns.

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