Top Index Funds Based on IPO Stocks – FPX and CSD

Initial Public Offering

 as the Lifeblood of 

 Zesty Funds

The vitality of an initial public offering (IPO) is a compelling approach to growth for an exchange traded fund (ETF). As a rule, a newborn listing in the stock market has a way of outpacing the market averages, especially during the first year of its debut on the bourse. In the combined approach, the robustness and longevity of an ETF can be fortified by the vigor and potential of an IPO.

In the popular image, an IPO refers to the sale of equity to the general public upon the initial launch of a bantam venture on a stock exchange. In the financial community, however, the terminology is also used to denote any type of fresh listing on the bourse.

An example of the latter is a stricken firm whose equity was delisted in the throes of bankruptcy proceedings. If an overhaul of the struggling firm turns out to be successful, then the return of the outfit to the equity market is regarded as the IPO of a reborn stock.

From a different angle, an exchange traded fund is a handy way to participate in diverse markets ranging from equities and bonds to commodities and currencies. In terms of scope, an ETF may cover a broad swath such as a whole industry or even the entire economy. An example of the latter is an index fund based on the flagship benchmark of the stock market; namely, the Standard & Poor’s index of 500 giants on the bourse.

From the converse stance, a communal pool could focus on a compact niche. Examples in this vein range from computer hardware and real estate to precious metals and foreign currencies.

Whatever the choice of market, though, an initial public offering can perk up the return on a portfolio. Since the autumn of the 20th century, a raft of studies have shown that an IPO is apt to outpace the bourse as a whole during the couple of years of its debut.

On the downside, though, the basic equities of operating companies are in general inapt as the primary vehicles for investment by the mass of participants in the stock market. The reason lies in the endless hail of sideswipes and smashups in every industry ranging from mining and shipping to software and banking. The bugbear stems from a fact of life which is ignored by the simplistic models of orthodox finance. In the real world, companies of all stripes break down and go bust all of a sudden, or fade out and die off in slow motion.

By contrast, an index fund is much more likely to lead a long and productive life. The longevity of the vehicle springs from the continual process of renewal as the aging champs within the underlying index are replaced by rising stars in the marketplace. Given this background, the best course of action for the mass of investors is to funnel most or all of their savings into communal pools based on market benchmarks.

On the downside, though, a market index is wont to track the established firms within its field of interest. For this reason, the corresponding pool will contain little or nothing in the way of fledgling ventures.

As we noted earlier, newborn stocks tend to outpace their older peers; and likewise outrun the bourse as a whole. In that case, the canny investor can ratchet up the return on investment by fleshing out a primary position in an ETF in any domain with a secondary stake in one or more budding stocks within the same niche.

An alternative ploy is invest in an index fund that consists entirely of new-sprung stocks. A pioneer on this front lies in a tracking vehicle called the First Trust US IPO Index Fund; the ETF trades under the ticker symbol of FPX. Another spearhead is found in the Guggenheim Spin-Off Fund, which goes by the call sign of CSD.

To place the performance of the vanguards in context, the index funds can be matched against a couple of renowned benchmarks of the stock market. In the larger scheme of things, the Standard & Poor’s index of 500 heavyweights stands out as the leading proxy for the bourse as a whole. Meanwhile the S&P 400 Midcap Index is arguably the standard bearer within the vale of midsize stocks.

Each of the foregoing yardsticks has spawned an index fund of its own. The offsprings carry the ticker symbols of SPY and MDY respectively.

During a window of evaluation stretching from 2006 to 2013, the index funds based on infant stocks – namely, FPX and CSD – beat the prime benchmarks of the stock market by a hefty margin. For instance, CSD trumped MDY by a solid lead despite a modicum of turbulence along the way. Moreover, the overall gain for the live wire was more than twice the payoff of 37% for SPY.

The story was similar for FPX only better. On a negative note, the dynamo was a tad more volatile than SPY as well as MDY. On the upside, though, the cumulative gain for FPX over the entire stretch was about 29% higher than the copious bounty bagged by CSD.


NOTE:  The full briefing is a document in PDF form. The report, listed under the title of “IPO as a Growth Mode for an Exchange Traded Fund”, may be downloaded here.

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Midcap ETF Review for CSD, RPV and RYJ

 

Performance of Top Index Funds

Given the attractions of an exchange traded fund, a midcap ETF review for the stock market paves the way for investing in lusty firms of moderate size. For this purpose, the first order of business is to select a timespan for sizing up the returns on investment.

On one hand, a lengthy window of observation provides a heap of data for a thorough analysis of performance. On the other hand, the broad-based approach has its drawbacks as well. One stumper springs from the dynamism within the financial forum. Due to the explosive growth of index funds in the millennium, a prolonged timespan has the side effect of brushing aside numerous entrants that have stepped into the arena only in the recent past.

For this reason, the wily investor has to strike a balance between the conflicting factors in order to pick an apt window of evaluation. In striking a compromise, a time frame of three years seems like a fitting choice in general.

From a different stance, the financial crisis of 2008 was a watershed in the global economy. In recognition of the landmark, a duration of five years ending in spring 2013 has the advantage of spanning the epic blowup and its aftermath. For this reason, the longer window of half a decade can provide a host of pointers on the true nature of motley markets.

In addition to grasping the price action in the arena, the wise investor takes into account a number of additional factors relating to the short run as well as the long range. A case in point is a modicum of liquidity needed for the artful player to enter and exit a given market in a timely fashion.

A second hallmark of the savvy investor lies in an aversion for levered vehicles. The reason stems from the constant threat of sudden death and/or gradual demise that dogs any type of rickety scheme based on high gearing. Due to the specter of certain doom, only a heedless speculator lusts after shaky contraptions pumped up by the gimmicks of leverage. In other words, the wise investor relies only on sturdy rigs that move with the target market in a direct and forthright way.

In sifting through a database of index funds focused on midsize firms, a straightforward approach is to begin with a muster of the front-runners in the field. Then the other factors such as liquidity and risk can be brought to bear on the appraisal.

In line with this thrust, we begin with a tally of raw performance over the course of three years ending in the autumn of 2013. The resulting list of candidates can then be whittled down further by a couple of secondary screens. As we noted above, the first filter deals with the liquidity of the ETF in the marketplace. Meanwhile the second criterion concerns the directness of the setup; that is, the absence of leverage.

Based on this regimen, the top 3 index funds turned out to be CSD, RPV and RYJ. The purpose of these pools is to keep pace with their respective benchmarks: the Beacon Spin-off Index, the S&P Pure Value Total Return Index, and the Raymond James SB-1 Equity Index.

Among these pacers, CSD turned out to be the clear winner. Moreover the return on investment for the spearhead displayed a series of higher peaks as well as rising troughs over the span of half a decade.

Of the pair of runners-up, the average payoff for RPV over the past three years was comparable to that for RYJ. On the other hand, the former pool broke down more severely than the latter during the financial flap of 2008. After the smashup, though, RPV for the most part kept up with its rival and managed to eke out a slightly better performance in recent years.

To place the turnout of the high flyers in context, the eagles were compared against a couple of renowned benchmarks of the stock market. Looking at the big picture, the Standard & Poor’s index of 500 giants stands out as a popular proxy for the bourse as a whole. Meanwhile the S&P 400 Midcap Index is arguably the leading beacon within the vale of midsize stocks.

Each of the foregoing yardsticks has spawned an index fund of its own. The offsprings carry the ticker symbols of SPY and MDY respectively. On the upside, the trio of winning funds for midcap stocks – namely, CSD, RPV and RYJ – trumped the popular benchmarks of the bourse by a solid margin.

NOTE: The full report is a document in PDF form. The publication, listed under the title of “Midcap ETF Review for Investing in Top Markets”, may be downloaded here.  

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