Why Some ETFs Will Have to Miss Out on ARM’s IPO

Chipmaker Arm is set to go public through an initial public offering (IPO) on Thursday, marking one of three much-anticipated listings scheduled for September. Even though interest in Arm is high, the company’s stock is unlikely to be included in S&P Indexes, and thereby significant exchange-traded funds (ETFs), due to several issues.

Key Issues Preventing Arm From Entering Biggest ETFs

The long-awaited IPO of chipmaker ARM is set to launch on Thursday, marking the first major public debut by a tech company in over two years. However, while the demand for SoftBank-owned chip manufacturer’s shares is expected to be high, the stock will not be included in popular US ETFs.

Over the past years, technology investors have been increasingly utilizing ETFs as a direct way to gain exposure to the hottest stocks in the sector. But those interested in Arm’s stock will not enjoy such a privilege.

The main reason is that most ETFs are backed by major stock market indexes, which have strict rules that must be obeyed to become eligible for inclusion. Due to how these indexes are constructed and some Arm’s decisions, the chipmaker is unlikely to be included in the largest ETFs.

Primarily, Arm is not tracked by the indexes provided by S&P Global. This is because Arm is a UK-based company. Another factor likely to keep Arm excluded from the biggest ETFs is the funds’ free float requirements. To be more specific, many ETFs generally require that a company float 10% or more of its shares to qualify for inclusion, but Arm is looking to float just 9.3% of the company, according to Renaissance Capital.

Which ETFs may include Arm?

Still, it is essential to note that the aforementioned issues do not disqualify Arm from all ETFs. Notably, the chipmaker may be included in the Nasdaq-100 index, which has no float or market cap rules.

Several well-known ETFs use the Nasdaq-100 index as their benchmark, most notably the Invesco Nasdaq-100 ETF (QQQ) – one of the biggest in the US.

Another noteworthy ETF that Arm could potentially enter is the Renaissance Capital IPO ETF (IPO) – a fund that seeks to expose investors to the most extensive newly listed public stocks. This ETF asks for a free float of just 5%, making Arm eligible for inclusion.

The company is set to go public on the Nasdaq on September 14. Arm will offer 95.5 million shares at $51 apiece in the IPO under the ticker symbol “ARM.”

This article originally appeared on The Tokenist