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Investors Business Daily
Investors Business Daily
Business
MATT KRANTZ

Investors Find A 'New' Way To Make Money On Stocks This Year

S&P 500 investors seem to be saying "Out with the old and in with the new." Many newly public companies are leading this year's tentative rally higher.

Case in point: The $157-million-in-assets Renaissance IPO ETF returned 15.41% this year so far, says Morningstar Direct. That handily tops the S&P 500's 4.4% year-to-date return.

The powerful rally of recent initial public offerings is another sign of how investors are seeking more risk this year. And they're finding it with many of the investments that cratered last year, including IPOs.

"While the IPO ETF has returned 15.4%, part of IPO's higher return can be explained as a recovery from weak 2022 performance (when it fell  57.3%)", said Roxanna Islam, analyst at VettaFi.

IPOs Turn On The Jets

Much of this year's solid gain by IPOs is due to offerings that went public prior to this year. And again, many of the top performers are stocks that did poorly in 2022.

Take Coinbase Global, for instance. The cryptocurrency exchange's shares are the top-performing holding this year among the 87 stocks in the Renaissance IPO ETF. Shares are up an impressive 75.4% so far.

But this isn't one of the more recent IPOs. COIN initially listed in April 2021, and saw shares run up to more than 400 apiece. But the stock was an utter disaster in 2022, falling more than 80%.

That's turning around now. And the Renaissance IPO ETF can hold stocks up to three years after their IPOs. But there's still a steep uphill climb. Even after this year's rally, Coinbase is still down to roughly 60 a share.

"We have been seeing investors seeking more risk this year including growth, technology, innovation and crypto-related investments, particularly as many of these hit a bottom in late 2022, which has provided a good entry point," Islam said.

Not In The S&P 500

The potential for such powerful rallies are exactly why investors are buying into ETFs again this year, Islam says.

But another draw is that IPOs are so distinct from other mainstream investments that they can mitigate the fear of missing out. The IPO market "can also serve as a diversifier within a portfolio since it contains newer stocks which have zero overlap with the S&P 500," Islam said.

And by buying an IPO ETF rather than trying to pick winners, risk is tempered a bit too. Keep in mind that roughly a quarter of the stocks in the Renaissance ETF IPO are down this year. ProFrac Holding, an energy company that went public last year, has seen its shares sink 24% in 2023.

Investors, too, have another IPO fund to consider: The $850-million-in-assets First Trust U.S. Equity Opportunities ETF. It has 100 holdings and charges 0.57% annually, vs. Renaissance IPO's 0.6% expense ratio.

IPOs Claw Their Way Back

But despite the solid showings of IPO ETFs this year, the number of companies brave enough to try to go public isn't bouncing back anytime soon.

Just 16 IPOs have sold shares to the public for the first time this year, flat with the same point last year, says Renaissance Capital. And these deals raised just $1.8 billion, which is down more than 10% from the same year-ago period.

And keep in mind that last year was a bust for IPOs. The number of IPOs in 2022 dropped more than 80% from 2021. But ETFs can help investors be ready for an uptick, if or when that happens.

"The IPO space provides access to these riskier areas without an investor having to track IPOs and pick stocks that do not have much existing research," Islam said.

IPOs Are Flying This Year Vs. S&P 500

Top-performing holdings in the Renaissance IPO ETF

Company Ticker Change in '23 Sector
Coinbase Global 75.4% Financials
Oak Street Health 65.5 Health Care
Qualtrics 58.4 Information Technology
Airbnb 48.8 Consumer Discretionary
AppLovin 44.5 Information Technology
Allegro MicroSystems 43.2 Information Technology
Global-E Online 43.0 Consumer Discretionary
Affirm Holdings 39.2 Information Technology
Procore Technologies 38.2 Information Technology
KE Holdings 37.5 Real Estate
Sources: IBD, S&P Global Market Intelligence
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