The explosion of SPACs, or special purpose acquisition companies, has changed the market over the past 18 months. And the trend has focused mostly, though not solely, on early-stage companies. Some SPAC ETFs have even emerged to capitalize on the trend.
Proponents of SPACs like Chamath Palihapitiya — who has launched six of these vehicles — argue that the SPAC mergers bring innovative, young companies not just to the public market, but to individual investors.
But those young companies bring risk to those investors as well. Early-stage investing is not easy.
In fact, the venture capital funds that often invest in similar businesses use a ‘basket’ approach. They know that some of their equity holdings are going to go to zero. The plan is for a few to deliver massive returns that more than offset those losses.
For many growth SPACs, particularly in hot sectors, such an approach makes sense. There are going to be losers.
It’s possible, and maybe even likely, that one or both of electric semi manufacturers Hyliion (NYSE:HYLN) and Nikola (NASDAQ:NKLA) fail to gain traction in the market. The same is true of consumer EV plays like Churchill Capital IV (NYSE:CCIV), which is merging with Lucid Motors and former SPAC Fisker (NYSE:FSR). A number of charging station developers are fighting for what is largely the same market.
Exchange-traded funds can provide that basket-based approach. By holding numerous SPACs, pre- and post-merger, they offer exposure to the group’s growth and potentially the big winners. The more diversified approach should limit the impact of the inevitable losers as well.
Investors interested in this strategy at the moment have three options:
- Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK)
- SPAC And New Issue ETF (NYSEARCA:SPCX)
- Morgan Creek-Exos SPAC Originated ETF (NYSEARCA:SPXZ)
SPAC ETFs: Defiance Next Gen SPAC Derived ETF (SPAK)
The SPAK ETF was the first SPAC ETF to come to the market when it launched at the end of September. What distinguishes it from the two funds that came after is that it is index-based, rather than actively managed.
In other words, the portfolio is established by rules. The fund is split 60/40 between companies that went public via SPACs and SPACs that haven’t yet merged. The former group includes top holdings DraftKings (NASDAQ:DKNG) and Opendoor Technologies (NASDAQ:OPEN), which combined comprise over 17% of the ETF. The third- and fourth-largest holdings are pre-merger SPACs Pershing Square Tontine (NYSE:PSTH) and Churchill Capital IV.
That aside, SPAK tries to capture the broader SPAC universe. As long as a stock, either pre-merger or post-merger has a market capitalization of $250 million and reasonable trading volume, it is included in the underlying index. Post-merger SPACs stay in for two years, long enough to capture early growth potential while also keeping intact the aim of investing in SPACs.
All told, an investor who believes in the SPAC trend should have interest in SPAK as well.
SPAC And New Issue ETF (SPCX)
But that investor might also believe she can do better with active management. That’s where the alternatives come in.
SPCX is one of the choices. The fund focuses solely on SPACs before mergers are announced. Unlike SPAK, SPCX’s holdings are based on the preference of the manager. In fact, the fund’s fact sheet argues that the sector “is no place for a rules-based strategy.”
The question is whether active management, in this style, necessarily is all that helpful. SPCX has 91 holdings, a decent chunk of the pre-SPAC universe. It’s not clear exactly why or how the manager plans to beat the market with such a large base of pre-deal SPACs.
Certainly, judging SPAC sponsors and understanding the target markets can be useful, but at the end of the day SPACs are about the deals themselves. Paying a nearly 1% annual expense fee seems pricy given the usual $10 floor on most pre-deal SPACs. And if there are indeed “too many SPACs,” as some believe, SPCX is vulnerable.
To be fair, if SPACs stay strong and are really here to stay, SPCX should be a winner. At the moment, though, both seem like big ‘ifs’.
Morgan Creek-Exos SPAC Originated ETF (SPXZ)
SPXZ looks a bit more intriguing for investors big on the broad SPAC trend. This fund is somewhat of a combination of the other two SPAC ETFs.
Like SPAK, SPXZ is split between pre-deal and post-deal SPACs, with a roughly one-third/two-third split. Like SPCX, it’s actively managed, with a broad portfolio (90 holdings) and relatively high expenses (1% annually).
There are some distinctions. Post-merger SPACs stay in the fund for up to three years. The portfolio is roughly equally weighted. Whereas DKNG is nearly 12% of the Defiance ETF, SPXZ’s largest current position, Danimer Scientific (NYSE:DNMR), accounts for just 2.48% of the fund.
SPXZ is the smallest of the three by assets — but it’s also the newest, having only launched in January. And while the fees are high, there is a case that including post-merger SPACs boosts the value and importance of active management. Some investors might believe they’re getting what they’re paying for.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.