Emerging growth stocks, as an asset class, underperformed high-growth tech in 2021. As such, I’m putting the “worst to first” strategy to work with my Top Pick for 2022, explains Kate Statler, editor of the newly launched advisory service, Cabot ETF Strategist.
Renaissance IPO ETF (IPO) tracks the largest, most liquid, newly-listed U.S. IPOs. It faced some tough year-over-year comparisons in 2021, after more than doubling in price in 2020.
Last year, many of the portfolio’s stay-at-home-friendly components, such as Zoom Video (ZM), Crowdstrike (CRWD) and Cloudflare (NET) were well-positioned for big gains. In 2021, it was down 10% as exuberance for some of those holdings waned.
The fact that many of these newly listed companies are not yet widely held allows for some potential asymmetry that savvy investors could benefit from.
The portfolio has a tilt toward large- and mid-cap stocks, so that limits volatility inherent in smaller companies, which could help smooth returns.
Here’s where the “worst to first” concept comes in: Because so many of the recent growth IPOs, such as the three mentioned above, are currently correcting, there appears to be an opportunity for investors to scoop up shares at a lower valuation. That’s especially true of recent IPOs with growing revenue, growing earnings or a combination of the two.
While many of these stocks have been volatile this year, these fundamentally strong companies will likely remain on institutions’ radar, which lends itself to an optimistic medium-term view. If you’re looking to get into newer companies in the early stages of multi-year run-ups, this ETF can be a way to express that investing viewpoint.