How ETF Investors Can Take Advantage of Deal Activity

With lower interest rates now in sight and renewed confidence in the stock market, deal making activity should pick up in 2024 after a slow couple of years. For retail investors, this could lead to new opportunities to invest in emerging industries and the potential to capture early returns. But it typically isn’t easy to invest in IPOs or play the M&A market. Here are ways investors can use ETFs to take advantage of the current deal-making environment.

IPOs Are Exciting for Investors

IPOs are exciting for investors. They can be a chance to invest in a trendy new product, like discount retailer Shein or Kim Kardashian’s Skims, which will both potentially go public in 2024. They can also be a chance to invest early in the next big tech company. For example, Reddit, while already an established social media platform, is now considering going public. However, IPO shares may not be easily accessible to retail investors. And those that are accessible may be difficult to research, which can add an extra layer of risk.

IPO Market Should Increase in 2024

After a surge of IPOs (including SPACs) in 2020-2021, the IPO market cooled off in 2022 and 2023. I expect IPO activity to increase in 2024 as investors regain more confidence in the market, interest rates come down, and innovation drives more high-profile tech-related companies. Potential IPOs like Shein, Skims, and Reddit may drive some of the most interest. However, I think there should be additional activity in the consumer discretionary sector and tech-oriented industries where artificial intelligence touches. Industries such as robotics, automation, autonomous vehicles. And this isn’t limited to the technology sector.

IPOs Are Generally a Good Thing for ETFs

In general, IPOs are usually a good thing for ETF investors. As emerging companies go public, they can be added to ETFs. This offers growth potential to existing ETFs and opportunities for the creation of new ETFs. A few examples would be ETFs in emerging industries like future mobility or thematic ETFs in disruptive technology.

Four ETFs focus specifically on IPOs. While these ETFs don’t purchase IPOs at initial prices, they can make the IPO market more accessible for retail investors who may not have the time and resources to research new issues. The First Trust U.S. Equity Opportunities ETF (FPX) and the Renaissance IPO ETF (IPO) both focus on U.S.-listed IPOs. While FPX is the larger of the two, IPO has outperformed recently, returning 32.8% over the past year compared to 20.1% for broader U.S. equity benchmarks. IPO invests in the largest, most liquid U.S.-listed newly public stocks with 0% overlap with the S&P 500. These stocks average 1.3 years since inception compared to 42 years for the S&P 500. While FPX has a similar methodology, its holdings cycle out every four years rather than three years. Currently, its top sector is industrials (with a 31% weight), which is only 5% of IPO’s weight. IPO has larger weights in technology and consumer discretionary stocks.