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A little over three years ago, I wrote a piece for Globe Investor about an exchange-traded fund called the First Trust US IPO Index Fund. The article wasn't terribly positive; it suggested that investors may not get what they were expecting, given the name of the fund versus the rules for how it picked its holdings.

What holders of the fund have got, however, is superlative performance: It returned 48 per cent last year, and it has a five-star rating from Morningstar.

What I wrote is still true: Investors in the fund aren't getting their hands on a basket of the hottest new stock debuts. What's more important, though, is that the fund may have found a way for its holders to benefit from the IPO market without exposing them to the worst of its risks.

The fund is a licensee of IPOX Schuster LLC, a small Chicago firm led by Josef Schuster, a PhD who did the background work for his indexes while at the London School of Economics. The First Trust US IPO Index Fund is based on his IPOX U.S. 100 index.

The index avoids some of the volatility of IPOs and has a "buy-and-hold" strategy. How so?

-IPOX Schuster adds IPOs or corporate spinoffs with a market capitalization of $50-million (U.S.) or more to its IPOX Global Composite Index on their sixth day of trading, avoiding some of the early fluctuations.

-Also, the index disqualifies IPOs that it deems improperly priced by underwriters. Using a formula based on normal first-day gains, it has typically (but not always) excluded IPOs that pop by 65 per cent or more on their first day.

-Once each quarter, the IPOX U.S. 100 Index selects the 100 largest U.S.-domiciled companies from the IPOX Global Composite Index. (It currently takes a market cap of $1.7-billion to make the cut.) The quarterly rebalancing means an IPO stock could trade for several weeks before getting into the IPOX U.S. 100 – and, consequently, the First Trust US IPO Index Fund.

-Once it's in, and remains among the 100 largest, it stays for approximately 1,000 trading days. It can stay even longer if removing it upsets the industry diversification of the index, Mr. Schuster says. (Phillip Morris was in for roughly 1,200 days.) That's the buy-and-hold part.

-A look at the IPOX U.S. 100 membership as of 2013's fourth quarter demonstrates how these rules combine to produce holdings you might not expect. Spinoffs Kraft Foods Group Inc. and News Corp. are in the index and the fund. While Twitter made the cut, some of the hottest IPOs of 2013, such as The Container Store Group Inc., Potbelly Corp., Noodles & Co., and Sprouts Farmers Market Inc. are not and never will be, regardless of their size, because they all doubled on their first day of trading.

So, yes, it may not be the IPO fund you – or I – might expect. (For that, we could consider the recently launched Global IPO Plus Aftermarket Fund from Renaissance Capital, which says it may buy IPOs at the offering price and will hold them for just two years.)

But the criticism of the IPOX U.S. 100 First Trust US IPO Index Fund misses the larger, more important point: performance. The ETF has beaten the S&P 500 in every year since its 2006 funding, save the 2008 market debacle. Morningstar gives it five stars on both a three-year and five-year basis, and it has a net expense ratio of 0.6 per cent.

"I'm not interested in the offering price or the first-day close – what we want to give investors are the opportunities that come afterwards. It takes away from the marketing appeal initially, but if you look at the return, it really doesn't," Mr. Schuster says. "I think the IPOX rule construction has been working out pretty well."

Hard to quibble with that conclusion.

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