ETF Exchange Traded Funds
What Is An Exchange Traded Fund?
An exchange-traded fund or ETF is an investment vehicle traded on stock exchanges, much like stocks or bonds. An ETF holds assets such as stocks, bonds, or futures. Institutional investors can redeem large blocks of shares of the ETF (known as "creation units") for a "basket" of the underlying assets or, alternately, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage and causes the value of the ETF to approximate the net asset value of the underlying assets. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500.
An ETF is Like a Mutual Fund and a Closed End Fund
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.
November 06, 2013 - Twitter IPO Puts These 3 ETFs in Focus by Zacks Investment Research
Twitter is finally making its debut on the New York Stock Exchange under the symbol ‘TWTR’ on Thursday. The offering is the world’s largest in the technology space since Facebook (FB) went public in May 2012.
The IPO could definitely be a hot one, as there has been plenty of interest in the company leading up to the first day of open trading. Twitter actually raised its price range from $17–$20 to $23–$25 just three days prior to its listing.
Being several times oversubscribed at the high range, the fastest growing social media firm closed its IPO yesterday, which is one day before its scheduled closure. A final price could even go above the high end.
Still, as per the Bloomberg data, Twitter at the high end of the range would be valued at 11.8 times projected sales for 2014 compared to 11.5 times sales for FB, so it is definitely in line with its most-comparable predecessor.
ETFs to Watch
The U.S. IPO market has been gaining immense popularity and is enjoying a huge rally this year, as investors clamor for new stocks with high growth potential. In fact, October was the busiest month since 2007, as 33 companies completed their IPOs, raising more than $12 billion (read: Profit from the Booming IPO Market with This ETF).
This led to a total of 190 IPOs in the first ten months of the year, compared to 132 in the year-ago period. These companies together raised $49.2 billion, higher than $45 billion in the same period last year.
This month would also be eventful, with two companies already completing their listing, one awaiting completion on Thursday and dozens of IPOs scheduled in the days to come.
Though the following ETFs do not have holdings in Twitter yet, and none are expected to buy on the first day, any of these could be worthwhile for investors seeking to take advantage of the listing. These funds are seeing busy trading and will continue to do so in the weeks ahead, and especially as they add Twitter to their baskets:
First Trust US IPO Index Fund (FPX)
This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $240.5 million in AUM and charges 60 bps in fees a year. Volume is moderate as it exchanges more than 63,000 shares in hand on average.
In total, the fund holds 100 securities in its basket with the largest allocation going to Facebook, AbbVie and General Motors Company that collectively make up for 26.24% share. Other securities hold less than 5% share each.
The ETF focuses on the 100 largest and most liquid, and generally adds stocks at its quarterly rebalancing date. However, if a firm is bought out or falls off that is already in the index, a new one to replace it can come in sooner.
Investors should also note that the float must be at least 15% of the total shares in order to be included, and Twitter will likely hover right around this mark. The index does have some discretion though, as it can add companies that might not otherwise be included in order to give a more accurate picture of the IPO market.
The product has a nice mix of sectors, with the top four being consumer discretionary, information technology, energy and healthcare. FPX was flat in the past ten days while up about 35.5% in the year-to-date time frame (read: 3 Niche ETFs Crushing the Market).
Renaissance IPO ETF (IPO)
This ETF debuted last month and has already attracted $28.4 million in its asset base. IPO sees strong volume of nearly 163,000 shares, ensuring no, or a slight, additional cost beyond the expense ratio of 0.60%.
Holding 50 stocks in the basket, the fund follows the Renaissance IPO Index, which holds the largest and most liquid newly listed U.S. initial public offerings. New companies look to be included on a ‘fast entry basis’ on the fifth day of trading (read: Track Initial Public Offerings with this New IPO ETF).
Currently, the product allocates more to FB at 10.13%, closely followed by Zoetis (9.57%) and Delphi Automotive (9.48%). From a sector look, technology stocks make up for one-fourth share while financials, consumer (services and goods) and healthcare account for double-digit exposure. The fund lost nearly 1% in the past 10 trading sessions but is flat since inception on October 16th of this year.
Global X Social Media Index ETF (SOCL)
This ETF offers the only pure play in the social media space. The fund has so far amassed $95.9 million in its asset base. The ETF charges 0.65% in fees and expenses and sees moderate volumes of roughly 97,000 shares a day.
The product tracks the Solactive Social Media Index, holding 28 securities in the basket. Tencent Holdings, Facebook and Sina Corp occupy the top three positions in the basket with a combined 30% share. Twitter is expected to be included in SOCL holdings at the close of the fifth trading session following the IPO (read: Social Media ETF in Focus As Twitter Plans IPO).
In terms of country exposure, U.S. firms take half of the portfolio, closely followed by China (27%) and Japan (8%). The ETF is up over 50% year-to-date but down 5.21% in the past 10 trading sessions. The fund currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.
The Twitter listing comes at the perfect time when social media firms are on fire and the U.S. IPO market is booming. The social media giant, Facebook, recovered from its losses faced during the troubled IPO times, jumping more than 70% over the past six months.
Shares of LinkedIn (LNKD) jumped over 27% over the past six months and more than quadrupled from the IPO price of $45. Yelp is also up 325% since its March 2012 IPO (see: all the Total U.S. Market ETFs here).
Further, two new listings – The Container Store Group (TCS) and Qunar Cayman Islands Limited (QUNR) – rallied in their first day of trading on Friday. TCS more than doubled while QUNR climbed nearly 133% before closing at 89% higher than the IPO price.
Given the huge success of the new listings and a prosperous IPO market, investors could consider these ETFs in their portfolio to make the most of Twitter and the rest of the social media and IPO space with lower levels of risk.
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