The financial crisis choked the flow initial public offerings (IPO) as few companies wanted to float their shares while the markets were in a tailspin. But that pent up demand has fueled an explosion of IPOs in 2011. This year already has seen 63 IPOs that have raised more than $22 billion. May was the most active month for new offerings with more than $6.3 billion raised in 19 deals. Technology-related IPOs accounted for 58 percent of last month’s total and 40 percent of the yearly tally of new offerings.  

Several high-profile Internet names went public last month. US-based professional networking site LinkedIn (NYSE: LNKD) raised more than $400 million in its IPO. China’s Facebook copycat Renren (NYSE: RENN), and Yandex (NYSE: YNDX), dubbed the “Google of Russia,” also floated their shares. The IPO pipeline is heavy on tech names; 36 technology companies have already filed for an IPO, including music streaming service Pandora Media and deal-of-the-day website operator Groupon. Investors also have been licking their chops for a Facebook or Twitter IPO for years.

The current enthusiasm for technology IPOs doesn’t square with the headwinds facing the equity markets or the global economy. The stock market’s taken a beating this month, but the IPO market has been partying like it’s 1999. Many of the new offerings bring to mind the IPO euphoria of 1999 and 2000; most of these companies have yet to turn a profit and operate on unproven business models. Despite these firms’ “creative” accounting practices, investors are throwing elbows to snag shares of these companies.

Of course there are always a few IPOs that warrant attention from investors. A number of semiconductor and hardware companies that have recently floated their shares present attractive value propositions. But with demand for new shares outstripping supply, the individual investor is usually blocked from tapping the IPO market.

Fortunately, two exchange-traded funds (ETF) will allow the average investor to share in the rich market for tech-related IPOs. What’s more, these ETFs entail less risk than an investment in the latest red-hot tech stock.

First Trust Dow Jones Internet Index (NYSE: FDN) has gained more than 40 percent over the past year on the back of rising demand for Internet stocks. In order to be included in the index, a company’s stock must have traded for at least three months with sufficient liquidity and an average closing price greater than $10. Consequently, the fund’s 40 holdings are mostly Internet behemoths such as Microsoft (NSDQ: MSFT), Cisco Systems (NSDQ: CSCO) and Apple (NSDQ: APPL). Although the fund’s portfolio does include some smaller companies, you won’t find any IPO fodder here.

Instead, this fund is an indirect play on the IPO market. The fund’s gains this year have been driven by rising interest in Internet-related IPOs. A rising tide lifts all boats and the very trends that have powered the IPO market will benefit the fund’s portfolio holdings.

Almost three quarters of US residents have Internet access. Countries such as South Korea boast an even higher Internet penetration rate and the number of Internet users in emerging markets is expected to double over the next four years. With this irrevocable trend toward greater connectivity already underway across the globe, portfolio holdings such as Microsoft and Cisco Systems will benefit from higher demand for operating systems and network hardware.

With an annual expense ratio of 0.60 percent and excellent liquidity, First Trust Dow Jones Internet Index is the best Internet-related ETF on the market.

First Trust Dow Jones Internet Index rates a buy under 40.

Another First Trust offering, First Trust US IPO Index (NYSE: FPX), provides investors with more direct access to the IPO market.

Liquidity is a major concern for ETF operators. Consequently, First Trust US IPO Index only holds shares that have traded for at least six days. This means the fund will miss out on a stock’s first day of trading, a critical period when the lion’s share of gains is booked. However, the fund tracks the performance of US IPO shares over their first 1,000 days of trading, leaving ample gains to be booked over the holding period.

The fund caps its exposure to any individual holding at 10 percent of investable assets. However, it’s rare for a single position to command such a heavy weighting; Philip Morris International (NYSE: PM) is the only stock with a 10 percent weighting, a result of the stock’s appreciation since it was added to the portfolio.

The fund has returned about 35 percent over the past year and has outperformed the S&P 500 on a three- and five-year basis with a very low correlation. Not only does the ETF capture the gains to be found in the IPO market, it also provides the benefit of portfolio diversification. Additionally, its 0.60 percent annual expense ratio is quite low for a specialty ETF.  

The fund’s liquidity does raise a red flag; only 7,200 shares are traded daily. But the daily bid-ask spread is fairly tight, averaging about 0.15 percent, due to active authorized participants. This means that investors should be able to execute most trades. Nevertheless, we recommend placing a limit order in order to execute trades at your desired price.

First Trust US IPO Index is a buy under 29 for more aggressive investors.