For all of the hand wringing about the weak start to the stock market this year, initial public offerings (IPOs) haven't been this hot since 1999.
More than 30 companies have already launched IPOs in 2014. That is a 72% increase compared to the same time last year, according to Renaissance Capital, and the best start to the year for IPOs since at least 2006.
The popularity of investing in IPOs should be really no surprise.
After all, the share prices of IPOs -- driven in part by the boom in biotech -- are trouncing the broader market in terms of performance.
And, IPOs always offer all of the attractions of a lottery ticket, but with much better odds. If you're lucky, you can make a year’s worth of returns in a day. IPOs in 2014 have “popped” an average of 14% on the first day of trading. And over the past 12 months, U.S. IPOs have been up by an average of 57%, according to Renaissance.
But here's a reality check.
For all of the hype, on average, most individual U.S. IPOs lose money.
Sure, thousands of Silicon Valley types have made a fortune in IPOs by vesting their options in companies that went public -- and by selling the stock as soon as their lock up expired. But that's an insider's game.
That said, if you crunch the numbers, you'll find it still pays to invest in IPOs, even as an outsider. Looking at the IPO sector as a whole, the gains of the winners compensate for the losers. On average, the IPOs return 15.1% during the first 12 months that they are publicly traded.
Those kinds of returns won't have you driving a Porsche overnight. But they are still solid enough to beat the S&P 500 consistently -- and with less volatility than you may think.
Here are two ways you can invest in IPOs at the click of a mouse -- the first one of which I own both myself and on behalf of my clients in Global Guru Capital's “American Alpha” Investment Program.
I. First Trust US IPO Index Fund (FPX)
The First Trust US IPO Index Fund (FPX) is the granddaddy of exchange-traded funds (ETFs) that invest in IPOs. It has also outperformed the S&P 500 by almost 2 to 1 over the past five years.
More recently, FPX boasts a 37.25% return over the past 12 months and has already added 2.78% year-to-date, even as the broader market is still in the red.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.
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