Make Money in Promising IPOs -- the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to invest in companies that have relatively recently debuted on the stock market, the First Trust U.S. IPO Index ETF (NYS: FPX) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The IPO ETF's expense ratio -- its annual fee -- is 0.60%. That's a bit higher than that of many ETFs, but also considerably lower than that of the typical stock mutual fund. (The fund is very small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.)

Interestingly, this ETF has a good performance record, while many IPOs don't end up doing too well at first. That's partly because it doesn't just focus on brand-new IPOs. Over the past five years, on average, it has topped the S&P 500. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Several recently released stocks had strong performances over the past year. Cobalt International Energy (NYS: CIE) , nearly doubling in value, has been volatile. It popped more than 50% in February on news of good results at a shallow well near Angola, and then dropped about 10%, announcing a big share offering that will likely dilute existing shareholders' stakes.

Philip Morris International (NYS: PM) advanced 43%, with many investors preferring its global focus over U.S.-focused Altria, which faces increasingly threatening regulations. But even though growth prospects are stronger abroad, other nations will likely beef up regulations, as well.

Marathon Petroleum (NYS: MPC) , spun off from Marathon Oil in June 2011, is up 31% so far this year. Cited as a stock that has it all, it has some investors' expectations high due to its concentration on the promising Gulf and Midwest regions. Some bearishness is growing, though, with the number of shares sold short more than doubling recently.

Other companies didn't do as well last year but could see their fortunes change in years to come. NXP Semiconductors (NAS: NXPI) shed 18%, but it's the primary maker of near-field communications chips, and sales of NFC-equipped cellphones are expected to triple this year to 100 million. Indeed, the next iPhone is expected to feature NFC technology.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these12 Dividend Stocks for 2012.

At the time this article was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, holds no position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International and NXP Semiconductors. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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