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IPO ETFs Breeze Past S&P 500 in 1H: What Next?

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IPOs staged a great show in 2020, despite the coronavirus pandemic.After being hit hard by the coronavirus-led rout in March, IPO ETFs seem to be to gathering steam now (read: Warner Music Debut, New Offerings to Boost IPO ETFs).

Early June marked one of the busiest weeks this year. The week was led by the debut of Warner Music Group (WMG - Free Report)  on Nasdaq, which raised $1.9 billion. ZoomInfo (ZI - Free Report) , a cloud-based platform for sales and marketing teams, also raised almost $1 billion last week.

About 79 IPOs have been filed this year, marking a 19.4% decline from last year. There have been 56 U.S. IPOs priced this year, down 22.2% from last year. Total proceeds raised were $18.4 billion this year, down 33.6% from last year.

Some of the winning IPOs of this year are business-to-business supplier of Internet gambling software-as-a-service solutions company GAN Limited (GAN) (IPO pricing up 194% since IPO on May 4), Inari Medical (INARI) (up 145.6% since IPO on May 21), American subscription-based software as a service company ZoomInfo (up 137% sinceJun 3), online used car seller Vroom (VRM - Free Report) (up 133% since Jun 8) and Forma Therapeutics (FMTX) (up 104.8% since Jun 18).

What Led to the Bounce in IPO Market?

The recent uptick in IPOs came amid the “biggest 50-day market rally in history” following the Mar 23 lows. Investors appear to show renewed interest in IPOs following the WeWork fiasco. Notably, the American co-working space operator's IPO was called off as it failed to amass retail investors’ interest even after slashing valuations to $10-12 billion from $47 billion .

A few months back, an EY report said that the United States may see a front-end loaded IPO in 2020, given the presidential election scheduled in November, which can cause volatility in the market.

What About International Market?

The IPO market has been equally upbeat internationally with Hong Kong expected to remain among the top three IPO markets globally in 2020, per PWC. In 2019, the Hong Kong exchange main board raised HK$314.5 billion through 169 IPOs, the highest amount of any global IPO market.

Changes in IPO rules have led to the success. Alibaba’s secondary listing in Hong Kong late last year will act as a cornerstone for other big Chinese and global companies to come up with plans to launch IPOs in Hong Kong.

Hong Kong’s stock exchange is now intending to lower the IPO settlement cycle from the current five days. Such a move will bring the world’s biggest listing market more in line with the competing bourses.

Brazil and Canada have solid IPO pipelines for 2020. Asia-Pacific is also expected to have seen a busy first half while EMEIA is likely to have logged an improved scenario with fading trade tensions and less ambiguity over Brexit.

What Awaits in 2H?

Though the coronavirus outbreak disrupted the impetus in March, the momentum returned with surging stock prices. However, with central bank and government stimulus-induced tailwind largely priced in, we expect a sideways market movement in the near term. Additionally, the second wave o f virus contagion and U.S. presidential election market may keep the market edgy in 2H. So, the rapid momentum of the IPO market is likely to be subdued in the second half of 2020.

How to Tap?

Against this backdrop, investors can tap ETFs like the U.S.-centric Renaissance IPO ETF (IPO - Free Report) andFirst Trust US IPO IndexFund (FPX - Free Report)  as well as international versions like Renaissance International IPO ETF (IPOS - Free Report) and First Trust International Equity Opportunities ETF (FPXI - Free Report) .

IPO, FPX, IPOS and FPXI have gained 34%, 5.4%, 18.2% and 28.9% this year, respectively, (as of Jun 22, 2020) in contrast to 2.7% losses in the S&P 500.

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