Outside the United States, IPOs are also notching double-digit gains — also unseen to most domestic investors. First Trust International IPO ETF (FPXI) is up over 13 percent so far this year, according to Morningstar data through April 10. First Trust's U.S.-focused IPO ETF, U.S. Equities Opportunities (FPX) is up 5.5 percent this year, according to Morningstar, and has near-$700 million in assets. The Renaissance IPO ETF (IPO), which is predominantly U.S. deals, is up 10 percent this year but has only $14 million in assets.
The First Trust International IPO ETF, meanwhile, is tiny — only $1.4 million in assets.
"Large and liquid IPOs are represented in the fund," said Ryan Issakainen, exchange-traded fund strategist at First Trust Portfolios. "It's a way to get exposure early on before institutions start buying."
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A primary reason to invest in an international IPO fund is the same as for a U.S.-focused one: access to stocks that indexes tend to drag their feet on adding, said Kathleen Smith, partner at Renaissance Capital. It took Facebook two years to make it into the S&P 500. Core international funds, such as MSCI EAFE and MSCI Emerging Markets Index ETFs, suffer from the same approach. Many investors take an approach that is the polar opposite, without even realizing it: Owning big-name tech stocks like Apple and index funds in which Apple is among the largest holdings.
The First Trust ETF is 61 percent exposed to Asia — with 33 percent specifically in emerging Asian stocks. Developed market Europe is 29 percent of the portfolio.Holdings, mostly in Japan and China, are big names like Alibaba and JD.com, along with lesser known stocks like Japan Post Holdings. Financials (40 percent) and consumer stocks (19 percent between cyclicals and defensives) are the biggest positions; technology is only 12 percent of the ETF, according to Morningstar data, which is below the benchmark and peer fund tech weighing.
Stocks are held for 1,000 days before they're sold. So they have potential for long-term growth. "IPOs can pop the first day and then have negative returns for the next year," Issakainen said.
Top 5 holdings in the First Trust International IPO ETF
- Japan Post Holdings and Japan Post Bank
- Postal Savings Bank of China
- Recruit Holdings
Foreign IPO markets are generating high-quality companies, says Josef Schuster, founder at the financial services company IPOX Schuster in Chicago, which manages the index that First Trust's ETF is based on. In Europe, companies taken to market are often less speculative and there are no big defaults, he said, but added that China is a mixed bag.
Globally, IPOs have been off to a buoyant start this year, led by Asia, and marking the highest first-quarter number of share sales since before the financial crisis, according to EY.