IPO ETFs: An Alternative Way to Enter the Initial Public Offering Business

This chapter focuses on the initial public offerings (IPO) ETFs, which constitute an alternative way to enter the IPO business. Short- and long-term performance of ETFs is examined vis-a-vis the performance of major market indices. Three types of returns are computed; the absolute, benchmark-adjusted, and abnormal return. Returns are computed for the initial trading day and for the first 2, 3, 4, 5, 21, and 63 trading days. Long-run returns are also calculated for the first 6, 12, 18, and 24 months of trading and for the entire history of ETFs up to October 31, 2016 from a cumulative and a buy-and-hold perspective. Risk-adjusted returns are estimated with a six-factor model. The results indicate that the average first-day return is positive but below 1%. In the long run, the cumulative absolute returns are positive during the several intervals examined, whereas the cumulative benchmark-adjusted and abnormal returns are positive only for the first 6 months of trading. These returns become negative after the first 6 months. Going further, ETFs deliver significant buy-and-hold returns over the several periods examined. Finally, the results reveal that just one out of the four IPO ETFs examined can produce a robust and statistically significant alpha.