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Will upcoming listings boost the Renaissance IPO ETF?

The Renaissance IPO ETF [IPO] hadn’t quite returned to the dark ages, but a recent trend of underwhelming technology stock debuts had dampened demand.

Renaissance Capital’s ETF soared by 108% in 2020, from $31.02 on 31 December 2019 to $64.49 on 31 December, boosted by the strong performance of newly listed tech firms during the coronavirus pandemic.

The Renaissance IPO ETF started 2021 well. Its share price rose 19.5% from the start of the year to an intraday high of $77.05 before it closed at $75.38 on 16 February. However, the fund had since dropped to $56.21 at the close on 7 May, marking a 12.8% decrease so far in 2021.

108%

Rise of the Renaissance Capital IPO ETF in 2020

  

The Renaissance IPO ETF was weighed down by the recent disappointing IPO of US cryptocurrency exchange Coinbase [COIN] last month. The stock slumped 19.7% since its IPO on 14 April to $263.70 on 7 May.

Other recent underwhelming public debuts include DoorDash [DASH], the shares of which had fallen 34.1% from 9 December 2020 to $124.89 on 7 May, and AppLovin [APP] — the stock fell 12.2% from 15 April to $57.26 on 7 May.

The Renaissance IPO ETF’s year-to-date total daily return, according to Yahoo Finance, was down 12.6% as of 10 May. The ETF had net assets of $647.7m. In comparison, the FirstTrust US Equity Opportunities ETF [FPX] had a year-to-date total daily return of negative 0.6%, and as of 7 May net assets were $1.9bn.

 

Investing in IPOs

The Renaissance IPO ETF, first launched in October 2013, gives investors exposure to newly public US companies ahead of each stock’s inclusion in core equity portfolios.

The fund tracks the Renaissance IPO Index, which was designed by Renaissance Capital to hold the largest, most liquid newly-listed US IPOs in one security.

Sizable IPOs are added on a fast entry basis — there is a 10% cap on large constituents — with the rest joining during scheduled quarterly reviews. Companies that have been public for two years are removed.

The ETF had 64 holdings as of 6 May, with Zoom Video Communications [ZM] having the biggest weighting at 9.2%, followed by Uber Technologies [UBER] with 8.4%, Coinbase on 6.3% and CrowdStrike [CRWD] with 6.1%. Other holdings include DoorDash and Roblox [RBLX].

Zoom’s share price soared 395.8% in 2020 (Eric Yuan, CEO of Zoom, pictured), as global lockdowns led to a rapid rise in the use of its video technology for remote working. However, the stock fell 12.5% in the year to date (through 7 May).

395.8%

Share price rise of Zoom in 2020

  

Although the company was still expected to see growth this year, there have been concerns that video call demand will be slower as societies begin to re-open following the COVID-19 vaccination roll out.

Uber’s shares have also reversed since climbing 71.5% last year, falling 7.8% in the year to date (through 7 May). The company reported a year-over-year revenue increase of 369% in the fourth quarter of 2021, despite having to reclassify UK drivers as employees following a Supreme Court ruling.

 

Valuation reset

Stocks, in general, have suffered recently amid rising US Treasury yields, with some investors considering that it could lead to a potential hike in interest rates to combat inflation.

“If that happens, the cost of borrowing for many growth stocks becomes more expensive. When growth becomes more expensive, valuations have to contract,” Luke Lloyd, investment strategist at Strategic Wealth Partners, told Forbes.

Analysts also see growing demand for more value stocks, such as commodities, in the months and years ahead rather than fast growth tech.

However, Russ Mould, investment research director at AJ Bell, raised concerns about future IPO demand. “Setbacks in Bitcoin are nothing new and cryptocurrency supporters will be unperturbed but the way the performance of IPOs is tailing off around the world is worthy of note,” he said in a note to clients.

“Setbacks in Bitcoin are nothing new and cryptocurrency supporters will be unperturbed but the way the performance of IPOs is tailing off around the world is worthy of note” - Russ Mould, investment research director at AJ Bell

 

“Perhaps the quality of deals is going down as the prices are going up, or, again, supply is starting to catch up with demand.”

For Kathleen Smith, IPO ETF manager at Renaissance Capital, fintech companies still have a lot offer the IPO market, including the much-anticipated Robinhood debut. “The IPO market is starting to get weighed under by the amount of issuance that we’ve seen, and the multiples so there’s like a valuation reset happening,” she told Yahoo Finance.

Despite the valuation headwinds, IPOs, including those in the tech space, are likely to keep coming. According to EY, there were 99 IPOs in the US in the first quarter that raised a total $41.1bn.

Disclaimer Past performance is not a reliable indicator of future results.

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The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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