--Just one IPO-focused ETF in a market saturated with stock funds

--Fund buys select IPOs and spinoffs, holds for years

--First Trust US IPO Index ETF has gathered assets slowly

 
   By Chris Dieterich

NEW YORK--The sprawling reach of exchange-traded funds has so far left the market for initial-public offerings virtually untouched, but the performance of the sole fund on the market has proven worthy of investors' attention.

Nearly 1,000 domestic and international equity ETFs dotted the investment landscape at the end of November, collectively valued at more than $1 trillion, according to recent data from the Investment Company Institute, a mutual-fund trade association.

Stock ETFs are raking in investors' money at a time when equivalent mutual funds have shed more than $100 billion this year.

Yet only one ETF currently fits under the IPO category of ETFs tracked by IndexUniverse, a research firm.

The First Trust US IPO Index ETF (FPX) climbed to an all-time high earlier this month. It has risen 28% in 2012 through Thursday, towering over a 15% gain for the S&P 500. And the fund's year-to-date returns are markedly better than if an investor was able to buy every IPO in the U.S. this year at the offer price and hold it, a strategy that would have netted a 17% return through Thursday, according to Renaissance Capital, an IPO research-and-investment firm.

The ETF tracks an index of U.S. IPOs and spinoffs developed by Josef Schuster, president of IPOX Schuster, an IPO research-and-investment firm based in Chicago.

The methodologies underpinning IPOX Schuster's suite of indexes are, essentially, to focus on the biggest, brightest stars, skip altogether the noise of first-day jumps or nosedives, and let the companies put their newly raised cash to work for a few years.

Data have shown the market performance of IPOs tends to lag. In an April analysis, Jay Ritter, a finance professor at the University of Florida, found between 1970 and 2010, IPOs trailed peers by an average of 3.3% during five years after issuing shares, excluding the first-day gain.

But Mr. Schuster has found much of the drag comes from a large chunk of small- and middle-capitalization companies.

"A few do extremely well, and the rest really underperform," he said.

The firm is selective, only buys after a given stock has been trading for at least a week and then holds on to shares for several years.

Many of its top holdings, which include spinoffs like Phillips 66 (PSX), hardly resemble cash-hungry startups. Among the fund's largest positions are Visa Inc. (V), which went public in 2008, and General Motors Co. (GM), which went public in 2010 after the U.S. Treasury bailed out the automaker a year earlier.

But big holdings also include the likes of Facebook Inc. (FB), which commands nearly 10% of the weight. Mr. Schuster first added Facebook in late September, according to Morningstar Inc., when shares prices hovered at roughly half of their May offer price.

The fund also holds stocks like luxury retailer Michael Kors Holdings Ltd. (KORS), which went public in December 2011. Its shares have climbed 78% this year.

First Trust US IPO likely won't be the only kid on the block forever. Renaissance Capital, for instance, has documents on file with the Securities and Exchange Commission to launch an ETF based on its one of its own IPO indexes.

ETFs, which trade like stocks, can provide investors simple ways to gain exposure to a risky IPO market, and tend to carry lower fees than mutual funds.

Since its inception in the 2006, the First Trust US IPO Index ETF has consistently beaten the total returns of the Standard & Poor's 500-stock index, yet it has collected only about $21.4 million in assets.

Mr. Schuster speculated investors aren't beating down the doors to buy the IPO ETF with the urgency of other stock ETFs because the market is perceived by some to be too risky. But he said the fund's track record shows IPOs and spinoffs are a "solid asset-allocation proposal."

Smaller, infrequently traded funds can make quick bouts of buying and selling more expensive, said Todd Rosenbluth, an ETF analyst at S&P Capital IQ. But "if the strategy makes sense, assets shouldn't be a deal-breaker," he said.

Write to Chris Dieterich at Christopher.Dieterich@dowjones.com

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