IPO ETF Doesn't Need Twitter

The big news out of the social media sector is that Twitter is taking steps to become a public company.

Goldman Sachs (NYSE:GS) will be the lead underwriter for the initial public offering and while that much is known, it has also been reported that Twitter still has not decided on an exchange on which to list its shares. That implies the IPO could still be months away.

For ETF investors, there is some excitement surrounding the possibility of the Twitter IPO. The Global X Social Media Index ETF (NASDAQ:SOCL) is out in front of that story as the issuer was the first to confirm it will add Twitter when it goes public.

Another ETF that is an obvious destination, at least at some point, for shares of Twitter is the First Trust US IPO Index Fund (NYSE:FPX). Using the example of the Facebook (NASDAQ:FB), SOCL was the first ETF to hold the stock, but for a while FPX was the ETF with the largest weight to shares of the social media darling.

FPX, which as was predicted in early January, has been a stellar performer this year and is up 28.3 percent. Said another way, the ETF may not need Twitter, but since FPX is "the IPO ETF," there will be speculation regarding when Twitter will find its way into the ETF's lineup.

Investors should not be holding their breath for Twitter popping up in FPX to happen right out of the gate. FPX is indeed an IPO, but often forgotten is the underlying index's methodology.

FPX does not need to race to include Twitter in its lineup because it can hold new stocks for up to 1,000 days after they come public. "The U.S. IPOX-100 Index has historically captured around 85% of total market capitalization created through U.S. IPO activity during the past four years," according to First Trust.

Importantly, FPX is not an ETF where the price action is determined by activity in the IPO market. That has been said before and it is inaccurate. FPX gained almost 29 percent in 2012, which was arguably just a mediocre year in terms of IPOs coming to market. FPX is an equity-based ETF and its underlying components determine the fund's fortunes, not large or small amounts of IPOs.

Another interesting point about FPX is just how new many of its holdings. Since the fund can hold stocks for up to 1,000 after an IPO, some of the newness will obviously wear-off. It should also be noted, that five of the ETF's top-10 holdings are either new versions of old companies, General Motors (NYSE:GM) for example, or spin-offs like Phillips 66 (NYSE:PSX) and Marathon Petroleum (NYSE:MPC).

From there, FPX's 51 holds are littered with spin-offs are companies that were once public then taken private in private equity deals only to go public again. There is nothing wrong with this methodology, but it also says FPX is not a sure bet to include Twitter just weeks after the IPO. FPX's returns say it does not need to.

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Disclosure: Author does not own any of the securities mentioned here.