ETF Talk

How to Invest in Brand New Public Companies with ETFs

While internationally focused exchange-traded funds (ETFs) have been my topic of choice lately, I’m going to shift gears and examine ETFs related to initial public offerings (IPOs), starting with the Renaissance IPO ETF (IPO). For clarity, this fund will always be mentioned by its full name in this article.

As the Renaissance IPO ETF’s name implies, this fund invests in companies that recently have become part of the stock market by offering shares of their stock to the general public. An IPO occurs when the owner or owners of a private company decide to sell shares of their company on the open market, rather than selling directly to a private buyer.

Immediately after a company goes public, its share price is allowed to float freely on the open market. This can result in quick, substantial changes if the market doesn’t agree with the current IPO price. For instance, if the market has received a lot of hype about the company and views the prospects as stronger than the company’s actual current value implies, a quick run-up of the stock can occur. Sometimes though, this adjustment can be overdone and result in a decline, as was the case with the 2013 IPO of Twitter (TWTR).

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