Reduce Risk With IPO ETF

With seven IPOs, last week marked one of Wall Street's busiest weeks for new entries in quite a while. Companies making appearances included Artio Global Investors (ART - commentary - Trade Now), Colony Financial (CLNY - commentary - Trade Now), Vitacost.com (VITC - commentary - Trade Now) and the highly-sought-after battery company A123 (AONE - commentary - Trade Now).

While picking which newcomer firm will be successful can, at times, be like playing roulette, ETF investors have an instrument that reduces this risk.

First Trust U.S. IPO Index (FPX - commentary - Trade Now) is designed to track the IPOX-100 U.S. Index. This index is made up of the top 100 U.S. IPOs ranked quarterly. Firms range from large, mature companies such as Philip Morris (PM - commentary - Trade Now) to fast-growing and undervalued IPOs.

Firms are tracked on this index for their first 1,000 days of trading. The index is adjusted quarterly.

Before jumping in, investors should be aware of the risks associated with this instrument. FPX suffers from extremely low volume. The fund's three-month average volume barely breaks 3,000. Additional risk comes with the fund's quarterly rebalancing. With new companies of various sizes and sectors issuing IPOs, the fund's makeup can vary drastically from one rebalancing to another.

Year-to-date for the period ending Sept. 25, the fund is up 31%.

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At the time of publication, Dion had no positions in stocks mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.