Here’s a Safer Way to Play Canoo

President Joe Biden put the pop in stocks like Workhorse Group (NASDAQ:WKHS) and Lordstown Motors (NASDAQ:RIDE) when he announced on Jan. 26 that the federal government would replace its entire fleet with clean electric vehicles (EVs). Canoo (NASDAQ:GOEV), which also has plans for an electric multi-purpose delivery van, didn’t benefit from the good news. GOEV stock fell more than 3% on the news.

an electric vehicle charging. image represents electric vehicle overvalued stocks
Source: nrqemi / Shutterstock.com

It’s easy to see why Workhorse gained more than 30% on the news. It’s in line for a major contract from the U.S. Postal Service. Biden’s remarks just put it to the front of the line. 

In my most recent article about Workhorse, I suggested that 2021 would be more volatile given that General Motors (NYSE:GM) jumped into the electric commercial vehicle market in a big way. The powers that be chalked that up as a recommendation to sell. 

I don’t think I was quite that adamant about selling. I just suggested that GM’s entry into the market would make things tougher. I still consider it a speculative buy despite the 30% gain. But that’s water under the bridge. 

I’m here to discuss Canoo and its plans for EVs. 

In my last article about GOEV, I said the following:

This is my first chance to write about Canoo. While I think its vehicles are ugly as sin, I do like the financial restraint it’s shown over the past 12 months as it readies itself for actual production. I wouldn’t recommend you buy this stock if it’s for your retirement plan — although some would argue that if you’re not retiring for 30 to 40 years, it might be the perfect bet — but if you’ve got some fun money, I don’t think it would hurt to buy at $15 and change.

For those who like Canoo’s business model but aren’t willing to chase the next great trend on a whim, here’s a way you can have your cake and eat it too.

GOEV Stock is 1 of 86 Holdings

If you spend enough time writing about stocks and other financial investments, all sorts of public relations dressed up as news end up in your email box. One of the many hundreds of emails I’ve gotten from people in recent weeks caught my attention this morning. 

It just happened to come on the precise day I was tasked with writing about Canoo. The investment in question struck me as the perfect alternative to investing directly in the EV startup. 

Sponsored by Morgan Creek Capital Management, a North Carolina-based asset management company headed by Mark Yusko, who founded the asset manager in 2004 after leaving the Endowment investment office he created for the University of North Carolina at Chapel Hill.  

Yusko launched the Morgan Creek-Exos SPAC Originated ETF (NYSEARCA:SPXZ) in partnership with Exos Technology Financial Partners. The ETF is actively managed to invest in both pre- and post-combination SPACs.

I really like it because, as its marketing materials state, “SPXZ targets equal dollar weights so no one company, or group of companies, will have an outsized effect.” 

So, for example, in a market capitalization-weighted ETF, a holding like Pershing Square Tontine Holdings (NYSE:PSTH) would account for a large chunk of its assets due to its $5.5 billion market cap. In SPXZ, it accounts for just 0.62% of its total assets. 

Don’t get me wrong, I think PSTH is a great SPAC to hold, but you buy an ETF to spread the love while reducing the downside. 

In case you’re wondering, GOEV stock has a weighting of 1.81%, putting it just outside the ETF’s top 10 holdings. 

The Things to Like About SPXZ

As I said in the previous section, equal-weighted ETFs, especially when it comes to passive indexing, is the way to go. So, I’m definitely keen on SPXZ on this basis alone. 

The ETF’s plan, which it can deviate from, invests 33% of its assets in pre-combination SPACs and 66% in post-combination SPACs. The rationale being that the Canoos (post-combination) of the world have more potential upside in the near term than the Pershing Square Tontines (pre-combination) of the world. 

This explains why in an equal-weighted ETF like SPXZ, Canoo has a weighting 3x PSTH. 

The fund, according to its summary prospectus, has minimum size requirements for both types of SPACs. In the case of pre-combination SPACs, it selects stocks from the 50 largest by market cap. The minimum market cap of its 20 to 50 pre-combination SPACs is $100 million. 

For post-combination SPACs, it also selects SPACs from the 50 largest by market cap and a minimum of $500 million. It typically will invest in 20 to 50 post-combination SPAC holdings.

It currently has 86 holdings, with the largest weight reserved for Luminar Technologies (NASDAQ:LAZR) at 2.02%. Its focus is to invest in “companies of the future.”

The big downside: it has an annual expense ratio of 1%.

That said, the other two SPAC ETFs out there – the SPAC and New Issue ETF (NYSEARCA:SPCX) and Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK) – charge 0.95% and 0.45%, respectively. SPAK is less than half the management expense ratio of SPXZ. However, it is a passive, rules-based index, so the third entry in the SPAC ETF war isn’t out of line from a fees perspective. 

The Bottom Line

I’m always looking for alternatives to riskier investments such as GOEV stock. If you’re a speculative investor, investing in SPXZ won’t be for you. 

But for the average investor looking to bet some fun money on the companies of the future, SPXZ looks like an intriguing possibility. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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