**5.4 Market trend return analysis**

The outcomes of the market trend return analysis are provided in **Table 5**. The results are presented for absolute, benchmark-adjusted and abnormal returns over the descending and ascending paths of the S&P 500 Index and the S&P 600 Small Cap Index, respectively. For each single ETF and over each market path, the number and percentage of days with negative (or zero) and positive returns are displayed along with the corresponding average negative and positive returns.

To begin with, when the S&P 500 Index declines, the average IPO ETFs declines too on 75.31% of the corresponding trading days. The average absolute return on these negative days amounts to �86 bps. During the negative days of the S&P 500 Index, ETFs present an average positive absolute return on 24.69% of negative trading days. When the market goes up, IPO ETFs move upward too on 62.08% of the respective positive days delivering an average return of 102 bps. Moreover, during the positive path of the S&P 500 Index, ETFs move opposite to the market on 37.92% of days. When we use the S&P 600 Small Cap Index as a proxy for the stock market return, we obtain similar results.

The main conclusion that can be drawn from the discussion of absolute returns is that IPO ETFs are quite but not absolutely aligned to the overall stock market. The fact that when the market moves downward, IPO ETFs have more than 20% probability of moving against the market indicates that IPO ETFs can possibly be useful hedging tools during turbulent stock markets. However, the significant number of negative return days (i.e., 37.92%) when the stock market moves upward should be borne in mind when planning investment strategies with IPO ETFs.

portfolio, the results about the SMB factor are opposite to those just discussed. All the individual estimates are negative with the majority of them being statistically significant. This pattern was not expected but it could possibly be considered by the correlation of the SMB factor with the S&P 600 Small Cap Index.<sup>7</sup> This means that the effect of the size factor may be expressed by the positive slope of the market

**Benchmark: S&P 600 Small Cap Index 24 month Alpha Beta SMB HML UMD CMA RMW R2 Total period Alpha Beta SMB HML UMD CMA RMW R2** IPO �0.019 0.853<sup>a</sup> �0.431a �0.335<sup>a</sup> �0.203<sup>a</sup> �0.591<sup>a</sup> �0.606<sup>a</sup> 0.714 IPOS �0.007 0.304a �0.331<sup>a</sup> �0.200 �0.147b �0.112 �0.454<sup>b</sup> 0.069 FPX 0.023<sup>a</sup> 0.912<sup>a</sup> �0.630a �0.301<sup>a</sup> 0.013 �0.352<sup>a</sup> �0.372<sup>a</sup> 0.681 FPXI �0.037 0.497a �0.484a �0.219<sup>c</sup> �0.184a 0.132 �0.240 0.272 **Mean 0.002 0.694** �**0.453** �**0.296** �**0.042** �**0.366** �**0.546 0.538** *This table presents the results of a six-factor performance regression model. The daily excess return of IPO ETFs is successively regressed on the excess return of the S&P 500 Index or the S&P 600 Small Cap Index, and the Fama&French SMB (small minus big) factor, the Fama&French HML (high minus low book-to-price ratio) factor, the Carhart UMD (momentum) factor, the Fama&French CMA (conservative minus aggressive) factor, and the Fama&French RMW (robust minus weak) factor. The model is run over the first month, 3 months, 6 months, 12 months, 18 months, and 24 months of each ETF's trading history excluding the month of each ETF's launch on the stock exchange. The model is also run over the entire trading history of each ETF up to October 31, 2016 also excluding*

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

On the impact of the value factor on performance of IPO ETFs, the relevant estimates of the HML variable are all negative with most of them being statistically significant at the 10% or better, especially when the 12-month or longer estimation windows are considered. This finding applies to both versions of the model, namely either when the S&P 500 Index or the S&P 600 Small Cap Index is used. Based on Fama and French [44], the strongly negative slope of the HML factor indicates that IPO ETFs may be deemed as to resemble low B/M (i.e., book-to-market) growth stock portfolios. This is true given that the stocks that comprise the underlying indices of IPO ETFs are usually small cap companies that go public with strong

The next variable considered is the momentum factor of Carhart. The majority of the relevant sample average estimates are positive, especially in the short-run, namely over periods up to 12 months. In the long run, the average momentum coefficients are negative. A negative sample average is obtained when the entire trading history of each ETFs is taken into consideration when running the performance regression model. At the fund level, when the first version of the model is assessed (i.e., the one with the S&P 500 Index), about half of the momentum

<sup>7</sup> We have computed an average correlation between the SMB and the S&P 600 Small Cap Index of 0.55 over the various time intervals that correspond to the trading history of each ETFs under examination. <sup>8</sup> To verify that the results reported with the usage of the S&P 600 Small Cap Index are not spurious, we run performance regressions after detracting the SMB variable from the model. The results obtained do

perceived potential for significant growth in the future.

not differ significantly from those reported in **Table 4**.

*the month of each ETF's launch on the stock exchange. <sup>a</sup> indicates statistical significance at 1% level.*

*indicates statistical significance at 5% level.*

*indicates statistical significance at 10% level.*

*Risk-adjusted performance analysis.*

index.<sup>8</sup>

**116**

*b*

*c*

**Table 4.**

Taking the analysis a little further, the results on the benchmark-adjusted returns are very interesting. More specifically, during the negative days of the stock market, the benchmark-adjusted returns decline too but only on 36.51% (28.26%) of the respective trading days in the case of the S&P 500 Index (S&P 600 Small Cap Index). The opposite trend is presented when the market ascends, namely the benchmark-adjusted ETF returns decline by a rate of 61.32% (or 68.19%) trading days depending on the index used to represent the stock market. The outcomes obtained on benchmark-adjusted returns verify that IPO ETFs can be used as hedging tools over the negative paths of the stock market; however, hedging efficiency is in question when equity prices increase.

**Benchmark-adjusted returns**

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

*DOI: http://dx.doi.org/10.5772/intechopen.90269*

IPO 182 49.73% �0.643 184 50.27% 0.517 IPOS 51 19.62% �1.218 209 80.38% 0.794 FPX 555 45.49% �0.448 665 54.51% 0.566 FPXI 78 31.20% �0.628 172 68.80% 0.693 **Mean 217 36.51%** �**0.734 308 63.49% 0.643 Ascending S&P 500 Index**

IPO 199 49.63% �0.509 202 50.37% 0.515 IPOS 211 80.53% �0.895 51 19.47% 1.461 FPX 681 47.39% �0.566 756 52.61% 0.405 FPXI 170 67.73% �0.789 81 32.27% 0.601 **Mean 315 61.32%** �**0.690 273 38.68% 0.745 Descending S&P 600 Small Cap Index descending**

IPO 154 42.66% �0.564 207 57.34% 0.547 IPOS 43 17.48% �1.260 203 82.52% 0.944 FPX 390 30.98% �0.477 869 69.02% 0.723 FPXI 52 21.94% �0.681 185 78.06% 0.789 **Mean 160 28.26%** �**0.745 366 71.74% 0.751 Ascending S&P 600 Small Cap Index**

IPO 220 54.19% �0.575 186 45.81% 0.466 IPOS 217 78.62% �1.054 59 21.38% 1.256 FPX 908 64.95% �0.706 490 35.05% 0.458 FPXI 198 75.00% �0.865 66 25.00% 0.661 **Mean 386 68.19%** �**0.800 200 31.81% 0.711 Abnormal returns Descending S&P 500 Index**

IPO 177 48.36% �0.638 189 51.64% 0.523 IPOS 73 28.08% �1.227 187 71.92% 0.467 FPX 592 48.52% �0.462 628 51.48% 0.557 FPXI 99 39.60% �0.759 151 60.40% 0.509 **Mean 235 41.14%** �**0.771 289 58.86% 0.514 Ascending S&P 500 Index**

IPO 199 49.63% �0.509 202 50.37% 0.516 IPOS 191 72.90% �0.529 71 27.10% 1.382 FPX 713 49.62% �0.555 724 50.38% 0.405

**119**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**No of neg. % of neg. Average No of pos. % of pos. Average**

When it comes to abnormal returns, we can in see in **Table 5** that they behave qualitatively equal to benchmark-adjusted returns. In particular, they move against the negative markets on 58.86% of the corresponding negative trading days, whereas when the pricing in the market are positive, IPO ETFs have a 57.08%



#### *IPO ETFs: An Alternative Way to Enter the Initial Public Offering Business DOI: http://dx.doi.org/10.5772/intechopen.90269*

Taking the analysis a little further, the results on the benchmark-adjusted returns are very interesting. More specifically, during the negative days of the stock market, the benchmark-adjusted returns decline too but only on 36.51% (28.26%) of the respective trading days in the case of the S&P 500 Index (S&P 600 Small Cap Index). The opposite trend is presented when the market ascends, namely the benchmark-adjusted ETF returns decline by a rate of 61.32% (or 68.19%) trading days depending on the index used to represent the stock market. The outcomes obtained on benchmark-adjusted returns verify that IPO ETFs can be used as hedging tools over the negative paths of the stock market; however, hedging effi-

When it comes to abnormal returns, we can in see in **Table 5** that they behave qualitatively equal to benchmark-adjusted returns. In particular, they move against the negative markets on 58.86% of the corresponding negative trading days, whereas when the pricing in the market are positive, IPO ETFs have a 57.08%

> **Absolute returns Descending S&P 500 Index**

IPO 260 71.04% �1.103 106 28.96% 0.426 IPOS 202 77.69% �0.564 58 22.31% 0.855 FPX 958 78.52% �1.103 262 21.48% 0.451 FPXI 185 74.00% �0.685 65 26.00% 0.570 **Mean 401 75.31%** �**0.864 123 24.69% 0.576**

IPO **No of neg. % of neg. Average No of pos. % of pos. Average** IPOS 87 21.70% �0.419 314 78.30% 0.905 FPX 165 62.98% �0.352 97 37.02% 1.259 FPXI 253 17.61% �0.421 1184 82.39% 0.985 **Mean** 124 49.40% �0.297 127 50.60% 0.934

**Descending S&P 600 Small Cap Index descending**

IPO 273 75.62% �1.081 88 24.38% 0.386 IPOS 196 79.67% �0.568 50 20.33% 0.903 FPX 985 78.24% �1.089 274 21.76% 0.436 FPXI 177 74.68% �0.680 60 25.32% 0.573 **Mean 408 77.05%** �**0.855 118 22.95% 0.575**

IPO 74 18.23% �0.381 332 81.77% 0.889 IPOS 171 61.96% �0.355 105 38.04% 1.206 FPX 226 16.17% �0.401 1172 83.83% 0.994 FPXI 132 50.00% �0.327 132 50.00% 0.919 **Mean 151 36.59%** �**0.366 435 63.41% 1.002**

**118**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**Ascending S&P 500 Index**

**157 37.92%** �**0.372 431 62.08% 1.021**

**No of neg. % of neg. Average No of pos. % of pos. Average**

**Ascending S&P 600 Small Cap Index No of neg. % of neg. Average No of pos. % of pos. Average**

ciency is in question when equity prices increase.

*Linear and Non-Linear Financial Econometrics - Theory and Practice*


whole trading history of each single ETF up to October 31, 2016. The same intervals

Apart from computing short- and long-run returns, we use a six-factor regression model to assess the relation of ETFs' performance with certain variables, which include the market portfolio, the Fama & French size, value, investment and profitability factors and the momentum factor of Carhart. Our study concludes with a market trend analysis, which assesses the behavior of IPO ETFs during the

The results obtained are very comprehensive. At first, the analysis shows that the first-day return of ETFs is positive on average terms and, consequently, significant profits can be made on the first trading day of IPO ETFs. Going further, shortterm analysis shows that average daily returns weaken after the first trading day and over a period ranging up to 63 trading days after the launch of each ETF on the stock exchange. These findings lead to the conclusion that day traders would be possibly attracted by IPO ETFs, but investors with a short-term investment horizon not exceeding a quarter should probably avoid IPO ETFs as short-term profits from

When it comes to long-term performance, positive cumulative absolute returns are computed for the majority of ETFs over the various periods examined. However, when cumulative benchmark-adjusted and abnormal returns are assessed, returns are positive only over the first 6 months of trading whereas returns become negative over the next time periods under study. When we consider the long-run buy-and-hold returns, our analysis reveals that ETFs deliver such substantial returns, either in their absolute or benchmark-adjusted form. In other words, from a buy-and-hold perspective, IPO ETFs can beat the market as it is represented by S&P 500 Index or the S&P 600 Small Cap Index. In summary, the analysis of longrun performance shows that investors looking for significant profits in the long run

Regarding risk-adjusted performance, the regression analysis demonstrates that only one IPO ETF can deliver robust above market performance. The specific ETF was the first to enter the IPO ETF business, and it is about 8 years older than the other funds in the sample. This element provides a hint about a positive relation between age and long-run performance of ETFs. Moreover, regression results reveal that IPO ETFs are more conservative than the market. This assertion is verified by the systematic risk of ETFs which is, on average, significantly lower than unity. Furthermore, a positive effect of the size factor on ETF performance is revealed. On the contrary, a negative relation is revealed between ETF performance and the value factor of Fama & French. When it comes to momentum, results indicate that IPO ETFs are aligned with the stock market in the short-run but they deviate from it in the long term. Going further, the results concerning the Conservative Minus Aggressive factor verify a negative relation between investment and expected rate of return. Finally, as far as the Robust Minus Weak factor is concerned, the results reveal a negative relationship between the performance of ETFs and RMW, which combined with the CMA slopes indicates that the returns of IPO ETFs resemble the

returns of those firms with low profitability which nevertheless invest a lot. In the last step, the market trend return analysis shows that when the stock market descends, the absolute return of IPO ETFs declines too on about 76% of negative trading days. On the other hand, when the market moves upward, the prices of ETFs increase on 63% of the corresponding days. The opposite behavior is displayed by the benchmark-adjusted and abnormal return of ETFs. This means that when the market goes down, the ETF benchmark-adjusted and abnormal returns move to the opposite direction with a probability of 57% or more (depending on the type of return considered and the index used as the market

are used to compute relevant buy-and-hold returns.

*DOI: http://dx.doi.org/10.5772/intechopen.90269*

such investments would be in question.

**121**

descending and upward phases of the overall stock market.

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

from entering the IPO business can resort to IPO ETFs to do so.

*This table presents a trend analysis of IPO ETF returns, which considers whether the overall stock market, successively represented by the S&P 500 Index and the S&P 600 Small Cap Index, moves upward or downward. The types of returns considered are the absolute, benchmark-adjusted returns and abnormal return of ETFs and displayed in the table are the number and percentage of days presenting negative and positive returns over the descending and the upward cycle of the stock market as well as the corresponding average returns of ETFs.*

#### **Table 5.**

*Market trend return analysis.*

probability to present a negative abnormal return. Overall, the analysis of abnormal returns leads to conclusions similar to these reached through analyzing the benchmark-adjusted returns, namely IPO ETFs can be useful defending investment tools during bear markets, but their usefulness may be weakened during bull stock markets.
