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How to Tap the Booming IPO Market With ETFs

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The U.S. IPO market is red hot with some of the largest and most highly anticipated new listings hitting the market this week.

Royalty Pharma Plc, a buyer of biopharmaceutical royalties, has raised $2.2 billion by selling 77.7 million shares at a price of $28 per share, the top end of its price range. This represents the biggest IPO of this year so far. These shares will start trading later today on Nasdaq, under the ticker symbol "RPRX." The deal overtakes the recent IPO of Warner Music Group Corp. (WMG - Free Report) that raised $1.9 billion (read: Warner Music Debut, New Offerings to Boost IPO ETFs).

Royalty Pharma generated $500.9 million in revenues in the first quarter, up 15% from a year ago. Per Renaissance Capital, “Royalty Pharma is highly profitable and generates strong cash flow. It intends to pay a dividend with 2.3% yield at the midpoint.”

Other deals this week are from the biotech and healthcare sectors. Oncology biotech Forma Therapeutics Holdings Inc. is planning to offer 11.8 million shares priced at $16-$18 each to raise up to $212 million. The stock is expected to list on the Nasdaq under the ticker symbol “FMTX.” The company recorded a net loss of $34.8 million on revenues of $100.6 million in 2019 while reported net income of $5.3 million and revenues of $164.1 million in 2018.

Another oncology biotech Repare Therapeutics Inc. plans to raise $133.2 million by offering 7.4 million shares at price of $16-$18 each. The company will list on Nasdaq under the ticker symbol “RPTX.” The company had a loss of $12.6 million in the first quarter, wider than the loss of $4.8 million posted in the year-ago period. Biotech Progenity Inc. will likely list on the Nasdaq under the ticker symbol “PROG.” It plans to offer 6.7 million shares at $14-$16 each, raising up to $107.2 million.

Additionally, the Chinese cancer diagnostics provider Genetron Holdings Ltd is planning to offer 13 million American Depositary shares in the IPO, which is expected to be priced between $11.50 and $13.50 a share, to raise up to $175.5 million. The stock is expected to be listed on the Nasdaq under the ticker symbol “GTH.”

IPO Saw Huge Success

Vroom.com (VRM - Free Report) debuted on Jun 9 and soared 11.8% on the first day of trading. The online used-car car seller lost $143 million in 2019 and $41 million in its first quarter of 2020, both of which are loss expansions from the previous year. The company priced its IPO at $22 per share.

Warner Music Group was the big IPO that hit the market on Jun 3. The IPO was priced at $25 per share. The world's third-largest recording label gained about 20% on their first day of trading. Meanwhile, ZoomInfo Technologies (ZI - Free Report) skyrocketed about 60% on its first day of trading. An intelligent go-to-market platform priced its IPO at $21 per share on Jun 3, above its target range of between $19 and $20. It reported 40% revenue growth in the first quarter (read: IPO ETFs Sizzling Hot on Global Market Rally).

Shares of Legend Biotech (LEGN - Free Report) and Shift4 Payments Inc (FOUR - Free Report) jumped as much as 73.6% and 51%, respectively, on their debut on Jun 5. The successful debuts indicate investors’ strong appetite for new stock offerings post COVID-19 lockdowns.

How to Tap?

Investing in multiple IPOs at the same time can be a difficult task. So, investors can easily tap the IPO resurgence with the two domestic-focused ETFs discussed below. These funds have been seeing solid upside in recent weeks given the number of planned offerings. 

Renaissance IPO ETF (IPO - Free Report)

This fund provides exposure to the largest and most-liquid, newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a fast-entry basis on the fifth day of trading. The fund currently holds 50 stocks in its basket, with each accounting for less than 10.7% exposure. Technology is the top sector accounting for 47.7% share while healthcare and communication services round off the next two spots with double-digit allocations each. The fund has amassed $46.8 million in its asset base while it trades in a light volume of about 23,000 shares, probably implying additional cost beyond the expense ratio of 0.60%. The product has surged 11.8% in a month.

First Trust US Equity Opportunities ETF (FPX - Free Report)

This ETF focuses on the largest, best-performing and most-liquid U.S. IPOs, and follows the IPOX-100 U.S. Index. New companies can find entry into the fund’s holding after trading for a minimum of 100 days. In total, the fund holds 101 securities in its basket with the largest allocation going to the top two firms with nearly 7% share each while other securities hold no more than 4.53% of the assets. The fund has accumulated $1.2 billion in AUM and witnesses volume of about 106,000 shares per day. It charges 70 bps in fees a year and has gained 4.7% in a month (see: all the All-Cap Growth ETFs here).

Bottom Line

Considering the number of offerings in the pipeline, investors looking to take advantage of new growth stocks should definitely bank on these two ETFs. The success of the new listings will add further fuel to the booming IPO market.

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