Investing in IPO ETFs – Advantages and Disadvantages

Monday, August 24, 2009

Investing in IPO ETFs - Advantages and Disadvantages

IPO exchange traded funds are ETFs which allow traders to profit from the up-and-coming stocks. Investing in them holds many advantages and disadvantages.

Advantages of investing in IPO ETFs

These enable investors to gain exposure to IPOs when they are first introduced in the market. Investors can own diverse stocks from various industries and sectors.
They track some of the companies with the highest growth-potential and allow investors to profit from successful IPOs.
They follow specific rules for including and excluding the stocks in their portfolio and thus are often less risky than investing directly in those stocks.
They are periodically adjusted and thus are very good investments when markets are steady and rising.

Disadvantages of investing in IPO ETFs

They are risky investment instruments as IPO stocks can be highly volatile, over-valued and from small companies.
They are new instruments, and there is not much performance history available.
IPO stocks (after an IPO) may be more prone to failing in a down market.
The 1000 day selling rule (selling shares of companies on completion of 1000 days of public trading) can backfire, if major performing stocks are removed from the portfolio; like when Google is removed from IPOX-100 index.
The quarterly portfolio adjustments may cause opportunity loss (when a major performing company of the quarter is not included in portfolio) or loss (by retaining a major under-performing company of the quarter).