Make Money in Growing IPOs the Easy Way


Exchange-traded funds or ETFs offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some newly public companies to your portfolio, 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 First Trust ETF's expense ratio -- its annual fee -- is 0.60 %. The fund is very small, though, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed well, beating the S&P 500 over the past three and five years. 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.

Why IPOs?
Why invest in IPOs? Well, I typically advise people against it, since on average, newly public stocks tend to underperform.

More than a handful of newly public companies had strong performances over the past year. NXP Semiconductors NV (NAS: NXPI) , for example, surged 32%. It's in the business of near-field communications (NFC) chips. Some of its chips help facilitate mobile payment systems, such as on Google's (NAS: GOOG) Google Wallet service, while others aid digital video surveillance . Sales of mobile phones outfitted with NFC technology are expected to triple this year, to 100 million. NXP does have competition, though.

Energy transportation and storage company Kinder Morgan (NYS: KMI) , yielding 4.3%, advanced 18% over the past year. Its fans like its regulated operations and stable fee revenue. It's the second-largest oil producer in Texas, has the largest natural-gas network in America, and controls 75,000 miles of pipeline and some 180 terminals. It's also shareholder-friendly.

Other companies still don't even have a full year's track record to assess. Facebook (NAS: FB) , for example, debuted back in May and after falling quite a bit is now roughly near its debut price. The company has massive potential because of its billion-some users. As it figures out how to make more money off them, its stock could do well. Some concerns remain, of course, such as an inevitable slowing of its growth and the possibility of many insiders selling shares. Meanwhile, the company is growing abroad, and had some 10 million users in Japan earlier this year.

Phillips 66 (NYS: PSX) , the spun-off downstream business of ConocoPhillips (NYS: COP) , is up about 60% since its April debut. It's the nation's largest independent oil refiner. Its stock is less of a bargain now, though, and its bears worry about competition and tight profit margins. Meanwhile, the oil prices have fallen recently, sending the stock down a bit. The company recently hiked its dividend by 25%, so that it now yields about 2.3%, and it's doubling its share-repurchasing plans-

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.

The article Make Money in Growing IPOs the Easy Way originally appeared on

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Google. The Motley Fool owns shares of Facebook, Google, and Kinder Morgan and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, Kinder Morgan, and NXP Semiconductors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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