Challenges Loom for Arm Holdings Plc IPO as ETFs Remain Cautious Buyers

Challenges Loom for Arm Holdings Plc IPO as ETFs Remain Cautious Buyers

In the world of tech IPOs, Arm Holdings Plc’s impending initial public offering (IPO) has generated significant excitement, marking the first major tech IPO in over two years. However, this enthusiasm may not be fully shared by Exchange Traded Funds (ETFs), as several obstacles hinder their immediate participation in the Arm IPO.

Challenges Loom for Arm Holdings Plc IPO as ETFs Remain Cautious Buyers

Challenges in Arm’s Path

ETFs are typically an attractive avenue for corporations looking to sell stock, given their passive and long-term ownership base. Nevertheless, Arm faces unique difficulties that could limit its appeal to ETFs:

Exclusion from Major Indexes

The primary hurdle for Arm is its absence from the S&P 500, a requirement for inclusion in broad technology ETFs like the SPDR Technology ETF (XLK). Being a British company, Arm does not meet the criteria for inclusion in the S&P indexes, as these indexes predominantly feature U.S. firms. Furthermore, S&P mandates that a stock must have traded for at least a year and maintain positive GAAP earnings over the previous four consecutive quarters, which could pose further challenges for Arm’s eligibility.

Insufficient Free Float

Many tech companies limit the amount of stock they make available to the public (typically around 10-15% of outstanding shares) to boost stock prices. Arm, however, appears to be even more conservative, floating only about 9.3% of the company’s shares. This presents another barrier for ETF inclusion, as most ETFs require a minimum 10% free float.

Potential Solutions and ETF Buyers

Despite these obstacles, there are potential avenues for Arm to become an ETF holding:

– SoftBank, Arm’s owner, has the option to exercise the greenshoe, which could increase the free float by an additional 15%.
– Selling additional shares after the six-month lockup period expires is another possibility.
– Arm may find a place in the Nasdaq-100, which does not have float or market capitalization requirements. The Invesco Nasdaq-100 ETF (QQQ) is a notable ETF based on this index.
– ETFs specializing in IPOs, like the Renaissance Capital IPO ETF (IPO), have a lower free float requirement (5%) and could potentially include Arm.

Expert Opinion

Despite these potential ETF buyers, some experts advise caution when considering ETF investments based on IPOs. ETF investors typically benefit from diversification and should avoid making investment decisions solely based on the latest hot IPO. In the case of Arm’s IPO, its success will largely depend on factors beyond ETF participation.

In summary, while the Arm IPO has generated substantial interest among tech enthusiasts, its journey into ETF portfolios may face notable hurdles due to exclusion from major indexes and a limited free float. Nonetheless, avenues for inclusion remain, and the ultimate success of the IPO will depend on a combination of these factors and broader market dynamics.



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