An ETF for IPOs

03/24/2015 9:00 am EST

Focus: STOCKS

I'm a big believer in IPOs. Initial offerings give entrepreneurs the opportunity to go from early-stage startups to publicly traded firms in just a few years, explains Michael Robinson, editor of Money Morning.

And you'd be hard pressed to find a better IPO environment than we have right now. Some 275 companies went public in the United States in 2014, the highest number in 14 years.

Now is a great time for tech investors to take a good look at the First Trust IPOX-100 Index Fund (FPX), which tracks the market for IPOs and has long been one of my favorite exchange-traded funds (ETFs).

And I think every tech investor ought to consider holding it for the long haul. By doing so, you can grab the upside and excitement that IPOs offer without all the volatility inherent in new issues.

In other words, let FPX's fund managers do all the heavy lifting while you sit back and watch the profits pile up.

Now, FPX doesn't specialize in new tech stocks. Instead, it seeks to mirror the broad market for IPOs. And that's a good thing. FPX gives us a good combination of tech stocks and an entry into the broader market.

That makes it a great twofer in which 40% of the top 20 holdings relate to tech or the life sciences.

FPX, which holds 100 stocks, doesn't invest in every new IPO that comes along. Instead, these are focused and disciplined managers who seek to balance high returns with stable investments.

Indeed, FPX is weighted toward mid-caps, with a median market size of $5.6 billion. And the managers have been lucky enough to acquire stocks that cost just a little more than one times sales.

Over the past year, Facebook (FB) has remained FPX's top holding, accounting for just under 10% of the fund. I can see why. Facebook continues to ramp up sales across the board.

In the most recent quarter, it reported 1.4 billion users (roughly the size of China's population). It also has 700 million users for its WhatsApp servers, 500 million Facebook Mobile users, and 300 million people on Instagram.

But FPX has several other very impressive entries, including Alibaba Group (BABA), Splunk (SPLK), and NXP Semiconductors (NXPI).

Now trading at around $52, FPX is priced cheaper than many of its portfolio holdings. That's why I think this is the single most cost-effective way for the average investor to cash in on the IPO boom.

Over the past two years, FPX has returned 51% to investors, beating the Standard & Poor's 500 Index's profits during the period by more than 40%. I see no reason it can't do the same for the next two years, given how active the IPO market has become.

FPX fits in two of our investment categories. It's clearly focused on companies that have a lot of growth ahead. And, at the same time, this is a sleep-easy investment, a solid tech foundational play that puts you on the road to wealth.

You may not have the secret membership card that gets you invited to the IPOs that come out on Wall Street, but you'll soon find FPX to be the next best thing.

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