The so-called FAANG stocks have long been a favorite among investors around the world, and for good reason. These and similar companies are basically technology-focused, delivering excellent growth and returns for investors. Now, however, a report from Bloomberg suggests that there could be stronger performances among some of the lesser-known tech companies. What’s the best way to access these companies? through exchange-traded funds (ETFs).
Tech IPOs show strength
Some newly public tech companies outperformed their more established large-cap peers, the report said. Thanks to this performance, the small-cap ETF, which focuses on recently listed stocks, rose 7.6% in the first half of June. By comparison, the Nasdaq 100 gained 4.8% over the same period, while the S&P 500 gained 3.1%.
Dubbed the Renaissance IPO ETF (IPO), the ETF has been successful thanks to the boom of several new entrants to the tech industry. These include Chinese video entertainment company iQiyi (IQ), Spotify Technology SA (SPOT), Snap Inc. (SNAP) and Dropbox, Inc. (DBX). Notably, the list of stocks in the fund’s basket doesn’t feature any big names in tech. People won’t find companies like Facebook, Inc. (FB) or Alphabet Inc. (GOOGL) because they’re too far from their own IPOs to qualify. (See also: How to keep track of an upcoming IPO.)
The Renaissance IPO ETF tracks newly public companies based on market capitalization. To be included in the fund’s holdings, companies must be in the top 80% or so of new IPOs that have not yet been included in major U.S. stock indexes such as the S&P 500 or Nasdaq Composite. To best capitalize on the success of these new entrants into the public trading arena, the Renaissance IPO ETF is adding names on a “fast entry” basis, especially if the IPO is sizable. Additional companies are reviewed quarterly and added to this schedule.
Regardless of the success or failure of the stock post-IPO, names are removed from the fund two years after its first day of trading. It’s this last point that makes IPO funds different from many other ETFs. While some foundations are content to hold successful companies for a long time, IPOs are always looking for new names. It aims to continually revitalize its holdings by guaranteeing that no stocks are included in its basket for more than two years.
Currently, Spotify is the fund’s largest holding, making up more than 7% of its portfolio. United States Foods Holdings (USFD) came in second with a weight of 5.7%. Snap is a close second with 5.4% of the portfolio. Still, iQiyi has been the most important IPO name to date. As of mid-June, the success of iQIYI led to an increase of more than 57% for the month.
While the IPO depends on the success of the latest public offering, it has been a lucrative model so far. Overall, U.S. tech IPOs have been growing rapidly this year, with a weighted average increase of 77% by issue size. By comparison, the average return for newly public non-tech U.S. companies was just 12%.
“Some people think this is the Uber market, and we’re going to be operating until the Uber IPO happens,” said Rett Wallace, chief executive of Triton Research, adding that “people are excited about big companies.” As long as tech As the “big companies” continue to exist in the IPO space, it looks like the Renaissance IPO ETF will continue to be a success. (For more reading, check out: The ups and downs of IPOs.)