NEW YORK ( TheStreet) -- IPO investing is a difficult task, market by asymmetric information and volatile aftermarket performance. While picking the right IPO can be like winning the lottery, an investment in the wrong stock can have similarly dramatic results. As the economy heats up, more companies will be gathering the assets needed to "go public" and listing on exchanges across the globe. The chances that you'll pick the next Google ( GOOG) are low, and risks are high, so a compelling case exists for fund-structured IPO strategies. Direxion, creator of Direxion Daily Financial Bull ( FAS) and Direxion Daily Financial Bear ( FAZ) has announced its intention to launch the IPOX Global Long/Short mutual fund to capture the global IPO market. The fund will take an active approach to evaluating IPOs, and go long or short stocks accordingly. Recognized most notably for leveraged ETFs and mutual funds, Direxion's newest fund will use the same index provider as the existing First Trust US IPO Index ETF ( FPX). Also currently available to investors is the open-ended IPO Plus Aftermarket Fund ( IPOSX). Dr. Josef Schuster, architect of the IPOX Indexes, reports that the global IPO market captures an average of 2,100 firms and $2.5 trillion market cap over a four-year rotational cycle. This means huge potential returns for investors, if they can pick the right funds. By using an ETF like FPX or a mutual fund like IPOSX, investors can avoid security specific risk. Schuster notes that, "as an effect of the consequences of 'going public,' the return dispersion of constituents becomes huge over time." The risk/reward ratio for these firms is huge.
FPX, IPOSX and the upcoming Direxion fund use difference approaches to IPO investing that employ varying degrees of active management. The most passive of the group, FPX, is a modified value-weighted price index that tracks 100 of the largest and most liquid U.S. public offerings. The holdings are ranked quarterly by market cap, and the fund seeks to capture the most successful IPOs over time. The fund has a 0.60% expense ratio and has a year-to-date return of nearly 39%. IPOSX, and actively managed approach from Renaissance Capital, aims to invest in successful firms during and after the IPO process. Since investment in individual IPO offerings can be prohibitively expensive, this actively managed portfolio aims to capture a swath of the most popular offerings and make them accessible to investors. IPOSX has an expense ratio of 2.5% and a year to date return of 12.77%. Perhaps the greatest challenge faced by Direxion's upcoming IPO offering will be drumming up investor interest. Both of the existing IPO funds have only about $10 million in assets. FPX has a three-month average daily trading volume of just 3,000 shares. While IPO investing can be highly profitable, the risks of investing in an illiquid ETF can also be high. FPX's thin trading can pose a threat to risk-adverse investors who need to quickly trade in and out of the stock. Market recovery should help to increase the number of IPOs, and potentially the investor interest in IPO funds. While it may be best to stay on the sidelines for now, these funds are ones to watch.
-- Written by Don Dion in Williamstown, Mass.