A (I)POX on Your Portfolio

One byproduct of the exchange-traded fund boom is gimmicky ETFs. However, some funds that might at first glance appear gimmicky can be quite useful, like the First Trust IPOX-100 Index Fund (FPX), which started trading Thursday.

IPOX Schuster, which will manage the ETF, maintains several indices of IPOs trading in the after market. The stocks in the IPOX-100 Index, and by extension the ETF, are the 100 largest issues that are in their seventh through 1,000th trading days after coming public. This pulls in a broad swath of stocks that currently include such biggies as the Chicago Mercantile Exchange (CME) and Google (GOOG).

Over the last 10 years, the average annual return for IPOs has been 11.78%, vs. 8.84% for the S&P 500.

As you might expect, newer companies are usually smaller companies. The median market cap of the S&P 500 is over $90 billion; the average market cap for the IPOX-100 is $4.01 billion and $1.08 billion for the iShares Russell 2000 Index Fund (IWM). The IPOX-100 is 100% growth, so a better ETF to compare it to is the iShares Russell 2000 Growth Index Fund (IWO).

Because of the "growthy" nature of the fund, it looks quite expensive, with an average P/E of 37, price/book ratio of 6.79 and price/sales of 6.50.

The expense ratio of the fund will be 0.60%, which is competitive with the specialized ETFs offered by PowerShares.

As the chart below shows, the iShares Russell 2000 Growth Index Fund and IPOX seem to react to news in the same manner, but IPOX has dramatically outperformed.

Despite a reasonably tight correlation, they have very different holdings. Some 33% of IPOX's assets are in financial stocks, but only 12% of the iShares Russell 2000 fund. The iShares fund has 20% in health care; IPOX only has 4.5%. They have roughly similar weightings in consumer discretionary stocks and technology of 20% to 25% each.

Look At Those IPOs Go The IPOX-100 Index has soundly outperformed the iShares Russell 2000 Growth Index Fund

Source: FinancialContent.com

The IPOX-100's heavy leaning toward financials is largely due to Genworth Financial(GNW), CME and the NYSE Group(NYX), which are all top 10 holdings, at 4.7%, 4.3% and 4.0%, respectively, and will probably be in the fund for a while more.

IPOX-100 Index Top 10 Holdings (as of March 17)

Source: First Trust

Google is the largest holding at 10%, the maximum the fund allows. This eliminates some of the single stock risk that bedevils other narrow-based ETFs. While the exposure to Google isn't absurd, I would expect that if Google implodes, this fund would struggle.

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