The Arm IPO is here, but many ETFs will not be buyers

cnbc.com:

In this article

IPO and tech enthusiasts are excited about the Arm Holdings Plc initial pubic offering, and with good reason: it's the first big tech IPO in more than two years.

A lot is riding on its success. In this case, «success» for investors means demand is high and the price rises in the weeks and months after the IPO.

Still,  initially the deal will mostly be lacking one natural buyer:  Exchange Traded Funds.

Arm will be launching its IPO Thursday on the Nasdaq, selling 95.5 million shares at $51, the high end of the expected price range of $47-$51.

Tech investors increasingly use ETFs to gain exposure to broad tech sectors, and subsectors, like semiconductors.

However, some investors who would like to get immediate exposure to the Arm IPO through ETFs may be disappointed.

ETFs are generally a desirable target for corporations to sell stock to because the ownership base skews toward passive and long-term ownership.

However, this particular IPO highlights several difficulties that even large companies like Arm have in acquiring a broader ownership base through ETFs.

For the most part, ETFs are backed by indexes. These indexes have rules that must be carefully adhered to in order to qualify for inclusion.

Unfortunately, partly due to Arm's own decisions and partly due to the way the major indexes are constructed, ARM initially appears to be ineligible for the largest ETFs.

The largest index provider is S&P Global. To be included in broad technology ETFs like the SPDR Technology ETF (XLK), which tracks the S&P 500 Technology index, a stock must first be in the S&P 500, which Arm is not. 

The first problem is that Arm is not a U.S. company, it's British — which generally would exclude it from the S&P indexes.

«It is