**6. Conclusion**

In this paper, we examine the performance of the four IPO ETFs traded on the US stock market, which invest in equity indices comprised of companies that have recently gone public. We assess the short- and long-term performance of these funds by estimating their absolute, benchmark-adjusted and abnormal returns. The benchmark-adjusted and abnormal returns are computed against the S&P 500 Index and the S&P 600 Small Cap Index.

In the short-run, we first compute the first-trading-day return of ETFs and then the average daily returns over the first 2, 3, 4, 5, 21, and 63 trading days. At the long-run level, we calculate cumulative absolute, benchmark-adjusted and abnormal returns over 6-, 12-, 18-, and 24-month investment horizons as well as over the

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

whole trading history of each single ETF up to October 31, 2016. The same intervals are used to compute relevant buy-and-hold returns.

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 descending and upward phases of the overall stock market.

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 such investments would be in question.

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

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

probability to present a negative abnormal return. Overall, the analysis of abnormal

**Abnormal returns Ascending S&P 500 Index**

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

FPXI 141 56.18% �0.543 110 43.82% 0.721 **Mean 311 57.08%** �**0.534 277 42.92% 0.756 Descending S&P 600 Small Cap Index descending**

IPO 175 48.48% �0.619 186 51.52% 0.497 IPOS 73 29.67% �1.211 173 70.33% 0.491 FPX 607 48.21% �0.562 652 51.79% 0.566 FPXI 90 37.97% �0.790 147 62.03% 0.509 **Mean 236 41.08%** �**0.795 290 58.92% 0.516 Ascending S&P 600 Small Cap Index**

IPO 197 48.52% �0.500 209 51.48% 0.508 IPOS 192 69.57% �0.546 84 30.43% 1.243 FPX 725 51.86% �0.560 673 48.14% 0.493 FPXI 152 57.58% �0.551 112 42.42% 0.715 **Mean 317 56.88%** �**0.539 270 43.12% 0.740** *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*

**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**

benchmark-adjusted returns, namely IPO ETFs can be useful defending investment tools during bear markets, but their usefulness may be weakened during bull stock

In this paper, we examine the performance of the four IPO ETFs traded on the US stock market, which invest in equity indices comprised of companies that have recently gone public. We assess the short- and long-term performance of these funds by estimating their absolute, benchmark-adjusted and abnormal returns. The benchmark-adjusted and abnormal returns are computed against the S&P 500

In the short-run, we first compute the first-trading-day return of ETFs and then the average daily returns over the first 2, 3, 4, 5, 21, and 63 trading days. At the long-run level, we calculate cumulative absolute, benchmark-adjusted and abnormal returns over 6-, 12-, 18-, and 24-month investment horizons as well as over the

returns leads to conclusions similar to these reached through analyzing the

*upward cycle of the stock market as well as the corresponding average returns of ETFs.*

markets.

**120**

**Table 5.**

*Market trend return analysis.*

**6. Conclusion**

Index and the S&P 600 Small Cap Index.

portfolio). The main conclusion drawn from the market trend analysis is that IPO ETFs can be useful hedging investment tools during bear markets, but their hedging efficiency weakens during bull markets.

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