The IPO That Matters
Arm Holdings Plc is set to launch its IPO on Nasdaq, offering 95.5 million shares at $51 each, marking the high end of the expected price range of $47-$51. In the world of tech investing, ETFs have become a preferred vehicle to gain exposure to broad tech sectors and subsectors, such as semiconductors. However, Arm’s IPO poses a unique challenge for ETF investors.
The ETF Conundrum
ETFs are typically an attractive option for corporations to sell their stocks, primarily because ETF ownership leans toward passive and long-term investors. Nevertheless, Arm’s IPO reveals a few hurdles that even a tech giant like Arm must overcome to attract a broader ETF ownership base.
Problem #1: Arm is Not in the S&P 500
The largest index provider, S&P Global, sets the stage for broad technology ETFs like the SPDR Technology ETF (XLK), which tracks the S&P 500 Technology index. To be included in these ETFs, a stock must first be part of the S&P 500, which Arm is not. Why? Because Arm is a British company, and this alone could exclude it from the S&P indexes. As Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, puts it, “It is unlikely it would be included in the S&P 500 given its domicile is in the UK.”
The Next Problem: A Free Float Below 10%
Tech companies often release a small portion of their stock (typically 10%-15% of shares outstanding) to create scarcity and drive up prices. However, Arm seems to be even more conservative, floating only about 9.3% of the company, according to Renaissance Capital. This poses another challenge for ETFs, as many require a company to float at least 10% of its shares for inclusion. The same applies to the largest semiconductor ETF, the Van Eck Semiconductor ETF (SMH).
Potential Solutions for Arm
To meet the 10% float requirement, Arm has a couple of options. One is to have SoftBank exercise the greenshoe, an option to release an additional 15% of shares, putting Arm just over the 10% float threshold. This decision could be announced after the pricing or disclosed a few days or even a month after the IPO. Another option is to sell additional shares after the six-month lockup period expires.
Hope for ETF Buyers: Nasdaq-100 and Specialized IPO ETFs
While the hurdles are significant, there are potential ETF buyers on the horizon. Arm may be eligible to enter the Nasdaq-100, a collection of the top 100 non-financial stocks in the Nasdaq, as this index has no float or market capitalization requirements. The Invesco Nasdaq-100 ETF (QQQ) is one of the largest ETFs in the U.S. and could potentially include Arm.
Additionally, specialized IPO-focused ETFs offer an opportunity for Arm to find a home. The Renaissance Capital IPO ETF (IPO), a basket of recent IPOs, requires a free float of only 5%, making Arm potentially eligible for inclusion.
A Word of Caution
Despite the potential avenues for Arm to find its place in ETFs, Nate Geraci of the ETF Store advises caution when playing IPOs through ETFs. He states, “One of the benefits of being an ETF investor is that you don’t have to worry about company-specific events such as this. Investors should understand what’s going on under the hood of any ETF they own, but I would dissuade anyone from buying an ETF simply because it has an allocation to the latest hot IPO.”
In conclusion, while Arm’s IPO promises excitement and potential gains for investors, the road to ETF inclusion may not be as straightforward. Arm must navigate these challenges and seize the opportunities presented by specialized ETFs to make its mark in the ever-evolving tech landscape.