Paradoxically, the trying economic conditions over the past several years have been perfect for super-rich and connected investors — the top 1% of the 1% — to exponentially increase their wealth.

#-ad_banner-#One of the more popular but seldom talked-about tactics is known as IPO flipping. This refers to the practice of buying IPO shares at the initial offered price then quickly reselling them once the shares start trading — and profiting from the initial pop.

However, only institutions, hedge funds and very wealthy investors are allocated shares by the underwriting broker before the IPO. Even though most regular investors are precluded from IPO flipping, they can still learn a profitable lesson — never purchase an IPO on the first day of trading.

Sure, it’s tempting to buy a newly issued stock as prices rocket higher that first day — but share prices often retreat just as quickly. This is because the flippers are dumping their often substantial allocations as the public is trying to scoop up shares.

Last year saw the most IPOs since the height of the dot-com bubble in 2000, and the surge in IPOs is showing no signs of abating this year. As of February, IPO filings and proceeds were far outstripping 2013 numbers, with a greater average first-day gain.

However, it’s important to note that the average market cap of IPOs this year has dipped dramatically during the first 60 days.

Because most investors aren’t allocated IPO shares to flip, the best and least risky way to get a piece of the IPO pie is with an IPO ETF (exchange-traded fund). The most popular such ETF is the pioneering First Trust IPOX-100 (NYSE: FPX). Launched in 2006, this ETF tracks the U.S. IPO market as reflected in the IPOX-100 Index. 

What’s most appealing about this ETF is that it has built-in risk-reducing measures. It doesn’t invest in every IPO: Its risk-reduction rules exclude REITs (real estate investment trusts), closed-end funds, and ADRs (American depositary receipts) of foreign firms. Companies must have a market cap of at least $50 million, and each company’s IPO must offer at least 15% of its outstanding shares. 

Most interestingly, the index ignores any company that skyrockets over 50% on its first day and doesn’t invest until the firm has been public for seven days. This strategy cuts into the potential profits from superstar IPOs that rocket out of the gate and keep on going higher, but its risk-mitigation benefits outweigh the rewards of catching a few high-fliers. 

Finally, companies are removed from the index on their 1,000th trading day. This keeps FPX true to its roots of being an IPO fund but may limit its upside.

Part of the First Trust fund family, FPX is considered to be in the large-growth category, with close to $510 million of net assets and has an annual expense ratio of 0.60%. Over the past five years, FPX has returned an average of 23.2% a year, including 31.1% last year. 

Facebook (Nasdaq: FB) is the top holding at just over 9%. Tesla (Nasdaq: TSLA), Kraft Foods (NYSE: KRFT) and Hilton (NYSE: HLT) are also among FPX’s top 10 holdings. Consumer cyclical stocks have the greatest sector weighting at 27.3%, followed by tech stocks at 18.9%, energy at 15.4% and health care at 15.2%.

Technically, shares have been trending down since topping $48.50 in early March. There is technical support at $43.50, and FPX is still solidly above its 200-day simple moving average near $43.

Risks to Consider: Investing in IPOs is very risky. Not every IPO is profitable, and sometimes they crash upon issue. FPX mitigates some of this risk, but some risk still remains. Always use stop-loss orders and diversify when investing.

Action to Take –> I like buying FPX on this pullback. Buying in the $45.50 to $44.50 range with stops just below the 200-day moving average at $42.50 makes solid investing sense right now. I would then the 200-day moving average as a line in the sand to re-enter positions when violated on the upside. My 12-month target for this ETF is $50.

P.S. America’s wealthiest investors have used IPO flipping for years to generate rising income. But in our latest High-Yield Investing research, we’ve found another little-known group of investments the wealthy have used to generate dividend yields of 12% or more for decades. To learn more about these special investments, follow this link.