FPX, First Trust IPO ETF, exchange traded fund or derivative?

fpx feb 10 2014

Did not even know this thing existed un till it was mentioned by E-wavers from Gainsville who point out that the outstanding volume in this gem increased about nine-fold in the past year or so. Also, as the chart shows, the value of a unit of this ETF has increased 4 to 5 times since the lows, outperforming every US index by a large margin.

Initial Public Offerings (IPOs) traditionally are priced too low. Intuitively this seems rather stupid as from a company’s treasury’s point of view you want to get the most out of it so you would prefer higher issue prices. However this consideration is often trumped  by the desire to have a “successful” issue, one that goes straight up. Furthermore management options are often priced at a discount to the issue price giving rise to larger capital gains. On top of that, brokers/dealers do not want to get caught with unwanted inventory and just love the potential to hand out freebies to there best clients. All this combines to make IPO shares a favourite investment provided you can get your hands on them early (very early!) in the game. Clearly this is not a buy-and-hold kind of thing as the IPOness wears off rapidly and therefore the stocks in the fund need to be refreshed constantly. Presently if holds stocks like AbbVie, Facebook, General Motors, Kinder Morgan etc.etc.

ETFs are not derivatives that derive their value by reference rather than actual ownership, like for instance commodity futures. The volume in these can expand well beyond the volume actually in existence with the link to reality only reasserted closer to the expiry date,provided the delivery requirements are in kind, not cash. The ETF actually has to own the stuff so additional interest is immediately and directly transmitted to the demand , or offered , side as the case may be. The risk with this particular one is that if the IPO market ceases to continue to  exist, this model will stop working all together. Long before that it is subject to all the other, normal risks. A sell in our opinion.