Should You Invest in the Red-Hot IPO Market?

The IPO market has been heating up lately as investors pile into riskier areas. Several high-profile private companies, particularly in the AI and crypto space, have debuted this year with strong first-day gains.

IPOs had boomed in 2020 and 2021 when interest rates were ultra-low, and liquidity was abundant. But when the Fed began raising rates, the market collapsed, and IPO activity went into hibernation for nearly two years.

Software firm Figma (FIG) more than tripled, and stablecoin issuer Circle (CRCL) more than doubled in their debuts. Since then, Circle is up about 87%, while Figma is down 17%. Bullish (BLSH), which jumped more than 80% on the first day, is now down almost 35%.

Highly anticipated upcoming IPOs include crypto exchange Gemini, payments company Klarna Group, and ticket broker StubHub Holdings.

The Trump administration is also reportedly considering IPOs for Fannie Mae and Freddie Mac, which could be the largest on record.

It’s important to remember that not all IPOs are successful. Investing in smaller, lesser-known companies can be quite risky. While a few of these fledgling firms may become excellent long-term investments, others can lead to significant losses.

Trading also tends to be volatile in the first few months as analysts and investors learn more about newly public companies.

An ETF approach can help reduce risk while still allowing investors to participate in the potential gains of a diversified group of larger, more liquid IPOs.

IPO ETFs provide exposure to newly public companies before they are added to major US equity indexes, which typically include them only after a seasoning period. For example, Google (GOOGL) and Facebook (META) were not added to the S&P 500 until about two years after their IPOs.

The Renaissance IPO ETF (IPO) holds the largest and most liquid newly listed IPOs. Companies that have been public for three years are removed at the next quarterly review.

The First Trust US Equity Opportunities ETF (FPX) holds the 100 largest and most liquid IPOs, including spin-offs. Palantir Technologies (PLTR), AppLovin (APP), and Robinhood Markets (HOOD) are among its top holdings.

Please watch the short video above to learn more.

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This article originally published on Zacks Investment Research (zacks.com).

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