With their knack for combining exotic assets into a single stock-like bundle, exchange-traded funds give investors the ability to easily trade hard-to-get things: stocks of tiny countries, corn and other commodities -- even abstract ideas such as "volatility." So it only seems natural that the $1 trillion ETF industry would try pushing into another corner of Wall Street: initial public offerings. "IPO"s are in the news now with the recent (and immediately controversial) debut of Facebook. But analysts say investors using exchange-traded products to capture the buzz of the IPO market are going to find a lot more -- and a lot less -- than they bargained for.
Indeed, these products are filled with what could be called IPOlds. For instance, the top holdings of the First Trust U.S. IPO index fund (FPX)
The product manufacturers say their wares aren't intended to get into an IPO the second it starts trading. First Trust says its ETF was designed, in part, for financial advisers wary of indulging clients who clamor for too much of the new thing. "It helps advisers dissuade clients from buying just one or two IPOs," says First Trust research analyst Eric Anderson. Experts say if investors really want a hotly anticipated stock, they're better off asking a broker to see whether it will have access to the IPO's shares on the day it goes public at its debut price.