Investors paying even casual attention to financial markets this year have probably heard something about special purpose acquisition companies (SPACs). SPACs are an asset class that turned into a hot theme and when that happens, an exchange-traded fund often follows. Enter the Defiance NextGen SPAC Derived ETF (NYSEARCA:SPAK). The SPAK ETF debuted last week.
For those that aren’t intimately familiar with SPACs, also known as blank-check firms, these are legitimate shell companies set up with the purpose of buying another company. The end game is to take the acquired firm public in a manner that differs from the traditional initial public offering (IPO). Broadly speaking, this can be a good deal for the SPAC stakeholders and founders and early investors in the company being acquired.
The old school IPO route can take six to 12 months. This is an unappealing timeline for companies looking to capitalize on niches that are hot right now, such as electric vehicles and internet casinos. Blank-check companies, including those residing in the newly minted SPAK, significantly reduce that timeline.
SPAK ETF Offers Some Advantages
With SPACs, the company has approximately two years to find an acquisition target or face liquidation. The problem is some investors are being seduced by blank-check hoopla. They are ignoring the very real issue of SPACs being pots that don’t always find lids.
Looked at differently, SPACs generally only appreciate in value AFTER announcing a deal. And in absence of such announcement, the units basically just trade flat. The SPAK ETF reduces much of this risk by allocating 80% of its portfolio to companies born out of SPACs. Examples include DraftKings (NASDAQ:DKNG) and Virgin Galactic (NYSE:SPCE).
The remaining 20% of the ETF’s roster is devoted to pre-deal blank-check companies. That’s adequate given the run-up plenty of blank-check companies deliver upon announcing acquisitions. Further diminishing the risks associated with SPAC investing is that SPAC holds some blank-check companies that have pending deals, including Flying Eagle Acquisition Corp. (NASDAQ:FEAC).
Another clear benefit of SPAK is one often associated with ETFs: Removal of the stock picking burden. In the SPAC arena, the reality is many investors stand an equally good chance of picking a loser like Nikola (NASDAQ:NKLA) as they do of selecting winners, such as DraftKings or Virgin Galactic.
The SPAK ETF significantly reduces that risk. That’s not to say each of its 36 holdings will be winners. But the fund’s status as a DraftKings proxy (20.55% to allocated to DKNG stock) could help the infant fund lure investors at a time when that sports betting name is scorching hot.
Buoyed by seemingly daily announcements of blank-check companies finding deals across myriad industries, the SPAK ETF already has $11.18 million in assets under management. That’s good work in less than a week and underscores investor appetite for anything SPAC-related.
The jury, however, is out and not just because this is a new fund. SPACs have been around for three decades and accruing momentum this year. But, that’s not a guarantee of positive returns. In fact, historical data suggest otherwise.
Since 2015, 93 companies were born out of blank-check deals and just 29, less than a third, generated upside as of Sept. 30, according to Renaissance Capital.
For those considering SPAK, the good news larger SPAC mergers typically performer better and returns are improving over the past year. Those are boxes the new ETF checks because many of its post-deal components were derived from sizable transactions in 2019 or this year.
Investors will pay 0.45%, or $45 annually on a $10,000 position in the new fund.
On the date of publication, Todd Shriber owns shares of DKNG.
Todd Shriber has been an InvestorPlace contributor since 2014.