Newly public companies are having a great year.
The Renaissance IPO ETF (IPO), which invests in companies that have gone public in the last two years, is outperforming substantially, up over 53% for 2020 and closing in on $100 million in assets under management. The ETF closed up nearly 1% after hitting an all-time high on Friday.
The ETF buys into the top 80% largest companies by market cap that have debuted in the last two years and rebalances quarterly to give the biggest players a chance to be added on a fast-entry basis. Its top holding as of Thursday were Zoom Video, Uber, Pinduoduo, Moderna and Nio.
But there’s a trend emerging that concerns Renaissance Capital co-founder and Chairman Kathleen Smith, she told CNBC’s “ETF Edge” on Monday.
While SPACs, or special purpose acquisition companies, have exploded in popularity this year as a way of “enabling companies that don’t have easy-to-study metrics to be acquired” and have certainly taken “some of the froth” out of the IPO market, they can still be dangerous investments, Smith warned.
“We’ve studied these once they make their acquisitions and the returns are much worse than the returns in the regular IPO market,” she said. “So, investors have to be pretty cautious about when they hold them and whether they’ll stay in through the acquisitions that are made at the end.”
Right now, “I think it’s really buyer beware with this vehicle,” Smith said.
As for IPO ETF, fast-growing companies including insurance provider Lemonade and mortgage lender Rocket Companies have put it in the “sweet spot” of investors’ appetite for growth, and the rest of 2020 should see that continue, Smith said.
“To see what the rest of the year is, take one look at what’s happened so far this year after the market basically shut down in March,” she said. “Year to date, we’re ahead of last year after that shutdown. And, in fact, … this August is going to finish up with more capital raised, I think, than any August on the record books. So, we’re seeing an amazing turnaround, an amazing amount of issuance in the regular IPO market.”
One of the most prominent events in the space this year will likely be the Hong Kong debut of Alibaba’s Ant Group, expected to be the largest IPO in the world.
“Our International IPO ETF, which includes stocks outside of the U.S., is going to be one of the early products that can hold Ant Financial,” Smith said. “While it’s not that well known here, it is going to be a very big name and an important name to hold in portfolios. So, the international product will give exposure to that and you can buy this in U.S. dollars, so, it’s a vehicle that’s efficient for a U.S. dollar investor.”
And Renaissance’s International fund will likely have early access, Smith said.
“Given its size, it will go in before a rebalance, so, as early as after five days of trading we’re going to include that in the ETF, the international ETF, because it’s so big,” she said.