STOXX Announces Euro IPO Indexes

European index provider STOXX has launched three new indexes covering European initial public offerings. The Dow Jones STOXX IPO indexes will aim to track the performance of new issues across three distinct time horizons three, 12 and 60 months. The

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European index provider STOXX has launched three new indexes covering European initial public offerings. The Dow Jones STOXX IPO indexes will aim to track the performance of new issues across three distinct time horizons – three, 12 and 60 months.

The indexes will include companies with a free float of between 100 million and 3 billion euro. The number of components may vary, although a 10-stock minimum will be maintained in order to guarantee index stability. The new indexes are “flexible and investable tools [which allow investors] to participate in the performance of this highly dynamic equity market segment from the first day a company is listed,” says Lars Hamich, managing director of STOXX Ltd..

For the three-month index, companies are added to the index the day after their IPO and will remain in the index for three months. “Companies are added to the index on the basis of their closing price after the first day’s trading,” says Mr. Hamich. The index is designed to underlie structured products.

The 12-month and 60-month indexes are designed as underlyings for medium- to long-term products such as ETFs and mutual funds. Components are added to the index on the second Wednesday after IPO. Mr. Hamich says that his firm’s corporate forecast list, which indicates which companies would be added to the index, would “smooth the process to make sure that there are no surprises.” He confirmed that the maximum component weight in the index would be capped at 20% of the index free float market capitalization to ensure that one large IPOm or one that outperforms significantly, could not skew the index.

“The best thing about ETFs is that you can trade millions of them without impacting the market,” says Mr. Hamich. “Apart from the tracking error between the underlying index and the ETF which can occur when the latter needs to hold a cash component in order to pay dividends of index companies, the price of the ETF will track the index. If there are discrepancies, they are usually arbitraged away quickly. If the ETF is priced significantly above the NAV of the component parts, arbitrageurs will buy the equity, add in any dividend cash components and exchange them for the ETF. If the ETF is underpriced, they will perform the reverse operation.”

Mr. Hamich confirmed that the immediate response from structured products and ETF providers to the new indexes has been “extremely positive” and that STOXX is already in talks with financial service providers who want to use the new indexes as the basis for ETFs and structured products. “I believe we may see the first products based on these new indices over the next few days,” he says. “These are simple-to-use products which will arouse interest for a number of reasons. Funds and even retail investors will no longer have to track or search for IPOs, nor to sign up for an allocation before the offering, with no guarantee that their order will be filled. They can get an index-tracking product and therefore outsource the maintenance.”

The products might attract directional hedge funds that want to make bets on future expectations. “They might for example want to buy the three-month index and hedge it against the 60-month index,” he says. The indexes will also provide active managers with a benchmark against which to measure the performance of their own IPO picks.

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