Should you invest in the new exchange-traded fund (ETF) that invests in initial public offerings (IPOs), called the First Trust IPOX 100 Index Fund?

Answering this question turns out to be quite complex and a simple “yes” or “no” is not possible.

The First Trust IPOX 100 Index Fund (TICKER:FPX) invests in 100 stocks chosen from the U.S. IPOX Composite Index. This index is designed to reflect IPOs during their first 1,000 days of life. The 100 stocks chosen for this ETF are generally those from this larger list that have the largest market caps.

For years, opinion about the initial public offering market was polarized. On one hand, a lot of individual investors found IPOs irresistible, in large part because of the much-vaunted price spike that the typical IPO experiences on its first day of trading. This enthusiasm for IPOs hit a crescendo in the late 1990s, of course, during the halcyon days of the Internet bubble.

To the same extent that many individuals were enthusiastic about IPOs, on the other hand, finance academics were virtually unanimous in believing that investors should stay away from them. After all, individual investors were hardly ever able to buy IPOs at their offering prices; those first-day price spikes were enjoyed primarily by favored institutional clients. And, when measured against more realistic prices that would be available to the individual investor -- such as the close of the first day of trading in the after market -- the average IPO lags the market for several years after going public.

If this were the state of the debate today, one would have to advise against investing in the First Trust IPOX 100 Index Fund. Its existence would have to be chalked up to a cynical attempt to earn management fees at the expense of a gullible public.

However, in recent years, this polarization has softened. Investors were burned by the popping of the Internet bubble, and researchers discovered that not all IPOs are created equal.

Yes, researchers still believe the average IPO does underperform the market. But, this underperformance is being caused in large part by companies going public with very little sales revenue. Remove them from the database, and the performance of the average IPO doesn’t look nearly as bad.

Consider data compiled by University of Florida finance professor, Jay Ritter. He constructed a database containing more than 6,000 IPOs that came to market between 1980 and 2002. He excluded from this database all IPOs whose offer price was less than $5, unit offers, ADRs, REITs, closed end funds, partnerships, banks and S&Ls.

The 3-year returns he reported were calculated from the close on each IPO’s first day of trading through its third birthday, or when the company went out of business, if it didn’t survive a three-year period.

Notice how the IPOs of companies with healthy sales in the year before going public performed much better than those whose sales were small. Because, as a general rule, the IPOs owned by the First Trust IPOX 100 Index Fund will have sales well in excess of $50 million in the year before coming to market, this bodes well for its performance.

Still, notice that, on average, even the largest IPOs lag the market over the three years after going public.

That’s not the final word on the subject, however. As we all know, IPO popularity waxes and wanes. Sometimes, the IPO market is so hot that investors are falling all over themselves to buy new issues at any price, and, at other times, that market is so cool that many companies decide not to even try to go public.

Researchers have found that, as a general rule, IPOs perform best when the small-cap growth sector is leading the market. So Professor Ritter compared each IPO in his database to an index composed of stocks with a similar market cap and at more or less the same place on the value-versus-growth spectrum.

On this basis, the larger IPOs perform more favorably still, outperforming comparable stocks by more than 10 percent a year on an annualized basis over their first three years of life.

Over the very long term, the small-cap growth sector lags the market. That’s why the average IPO can outperform the sector but still lag the market as a whole.

What this means: The First Trust IPOX 100 Index Fund is probably not a good substitute for your S&P 500 index fund.

However, if you are a so-called style timer, trading between the various market sectors according to perceived prospects for the large- and small-cap sectors and for the growth and value sectors, then there are times when FPX very well might be attractive.

Specifically, it will be attractive whenever you believe that the small-cap growth sector is about to lead the market.

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Mark can be contacted via email at mhulbert@marketwatch.com.