Huge opening-day pops in new public offerings tend to bring IPO investment vehicles out of the woodwork. However, if you think investing in these funds lets you participate, then think again.

On Thursday (7/21/11), UBS rolled out the ETRACS Internet IPO ETN (EIPO) and the ETRACS Monthly 2x Leveraged Internet IPO ETN (EIPL). The exchange-traded notes [1] will track (minus the 0.65% tracking fee) the UBS Internet IPO Index, which was created earlier this month (July 7) and has no performance history.

The index intends to measure the total-return performance of US-listed Internet companies that satisfy specified market capitalization and other eligibility requirements. The “innovative index construction” (their words, not mine) allows for the addition of new companies within weeks after their IPOs (also their words, but the emphasis is mine).

In other words, EIPO and EIPL investors won’t participate in opening-day gains for any IPOs because such stocks won’t be part of the index yet. At best, they will join the index weeks later. This may or may not be helpful in the long run.

The index is market-cap weighted and includes all share classes, not just the publicly available free-float shares. The issuer’s GICS Industry [2] designation must be either “Internet Software & Services”, “Internet & Catalog Retail” or “Media”, and each position is capped at a 10% weighting at the monthly rebalancing. There is a minimum of 15 companies in the index, and firms are typically no longer eligible after three years.

Presently the index has 20 constituents, with the largest being LinkedIn Corporation (LNKD) 10.0%, HomeAway Inc. (AWAY) 10.0%, Yandex NV (YNDX) 10.0%, Rackspace Hosting, Inc. (RAX) 10.0%, Pandora Media Inc. (P) 9.6%, Renren, Inc.ADR (RENN) 9.2%, OpenTable, Inc. (OPEN) 6.5%,, Inc. (ACOM) 6.0%, SouFun Holdings Ltd. ADR (SFUN) 3.4%, and Demand Media, Inc. (DMD) 3.4%.

It is unclear whether the indexing methodology was ever backtested. If so, UBS seems to have decided not to share the results on the ETRACS website. The data they are willing to share publicly includes the press release [3] (pdf), summary page [4], fact sheet [5] (pdf), and prospectus [6] (pdf).

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.