THERE'S SOMETHING ABOUT

getting in on the ground floor that quickens the pulse of investors. A new exchange-traded fund is looking to tap into that obsession.

The First Trust IPOX-100 Index Fund, launched Thursday, is the only ETF designed to reflect the performance of the U.S. market for initial public offerings. It's based on the IPOX 100 U.S. Index, managed by Chicago index firm IPOX Schuster. The ETF, which sports an expense ratio of 0.6%, debuted on the American Stock Exchange at $20 a share.

"Putting together an IPO ETF confirms that this is a separate asset class which is less correlated to the big indexes and offers the potential for more unique returns," says Kathleen Smith, a principal at Renaissance Capital, an independent research and money-management firm in Greenwich, Conn. Renaissance runs an actively managed IPO mutual fund, the IPO Plus Aftermarket Fund.

IPOs had their heyday in the late 1990s, when highly speculative Internet names routinely popped 100%, 200%, 300% or more during the first day of trading. Just about all of those stocks crashed back to Earth after the tech bubble burst, and new offerings dried up. But over the past three years, the IPO market has rebounded as underwriters focused more on fairly pricing the public offerings of stakes in businesses with proven track records.

"IPOs in 2004 and 2005 were marketed with very sober opening premiums, and the stocks have had incredibly dramatic runs to the upside since then," says David Menlow, president of IPOfinancial.com, an independent research firm in Millburn, N.J. "Over the last three years, if you invested in IPOs, you would've done better than investing in the S&P 500 Index."

According to First Trust Advisors, creator of the new IPO ETF, the IPOX 100 U.S. Index beat the large-cap-dominated S&P 500 index, Dow Jones Industrial Average and Russell 1000 index in 2003, 2004 and 2005. And over the past two years, it topped the Russell 2000 index, which tracks small-capitalization stocks. For the three years ended Feb. 28, the IPOX 100 U.S. Index had a trailing compound annual return of 32.6%, vs. 15.0% for the S&P 500 and 26.5% for the Russell 2000. The IPOX 100 U.S. Index consists of the 100 largest companies by market cap in the IPOX Composite Index, IPOX Schuster's broader index of recent IPOs.

A big reason IPOs appeal to the average investor is the fabled first-day gain. Unfortunately for those hoping to get a piece of this action, the new ETF won't help. That's because newly issued securities aren't added to the IPOX index until at least seven days after they debut. The stocks then stay in the index for the next 1,000 trading days. Google remains a major component of the IPOX Composite and makes up 10% of the IPOX 100.

Nor do all IPOs make the cut. American depositary receipts from foreign companies, real estate investment trusts, close-ended funds, unit investment trusts and limited partnerships are all excluded from membership. Only U.S. corporations can join the IPOX Composite. And even then they have to pass three tests. The company with the new issue needs to have a market capitalization of at least $50 million, float at least 15% of all the outstanding shares and have a less-than-50% gain on the first day of trading. Right away that knocks out this year's hottest issue, Chipotle Mexican Grill, which doubled its first day out.

Francis Gaskins, editor of IPOdesktop.com, an independent research firm in Los Angeles, says most of this year's IPOs gained at least 20% after the seventh day of trading. But that doesn't necessarily mean the IPOX 100 reaped the full benefit of those returns. Companies are added or removed from the index just once a quarter. That means investors would also miss most of the gains posted so far by this year's second- and third-biggest IPOs. Since they both debuted on Jan. 31, H&E Equipment Services and FortuNet have surged about 80% apiece.

"While you might miss out on a little bit, over 15 years it hardly makes a difference," says Josef Schuster, chief executive and founder of IPOX Schuster.

Renaissance Capital's actively managed IPO Plus Aftermarket Fund offers an alternative to the new IPO ETF, which like most ETFs seeks to mimic the performance of an index. The mutual fund has returned about 13% year-to-date and 32% over the past year. Renaissance uses several criteria including fundamentals, valuation and technical indicators to evaluate IPOs. It holds many of the stocks for as long as five years. The fund's expense ratio is 2.5%, and the turnover rate was 158% for its fiscal year ended Sept. 30. Top holdings as of Sept. 30 included Accuride, a maker of truck parts, and Diamondrock Hospitality, a lodging REIT.

"We believe IPOs have a tremendous opportunity because they are under-followed and they don't get much research, so they don't trade the same way as a more established stock," says Smith of Renaissance. "And that's why we think it's good to have intelligence in the money management of an IPO fund."

There's no clear choice between the IPO ETF and the IPO mutual fund. The actively managed fund beat the IPOX 100 Index in 2003, for example, with a total return of 52.2% vs. 30.8%. But last year, the IPOX 100 turned the tables by posting a gain of 23.3% vs. 4.3% for the IPO Plus Aftermarket fund. (The S&P 500 gained 3.3% in 2005.) One academic isn't even sure if either should have a place in the average portfolio.

"Over the past 25 years it's been hard to beat valuated market indices and as a group smaller IPOs have done abysmally," says Jay Ritter, a finance professor at the University of Florida. "Larger IPOs have come close to matching the market, but were not quite there. However, over the last couple of years, bigger IPOs have done well for two reasons. One is, after the bursting of the bubble, IPOs were out of favor, so the valuations left sufficient upside potential for investors. The second reason is Google."

Bottom line: An S&P 500 index fund is a lot less risky than IPOs, even a diversified portfolio of them. But owning the IPO mutual fund or ETF that gets in on the ground floor of the next Google is awfully tempting.