Private Equity ETFs: Buyer Beware

Retail investor access to institutional strategies is all the rage these days, but when it comes to access to private equity, we’re throwing a flag on the field. On this episode of ETF Zoo, ETF.com hosts Dave Nadig, President & Director of Research, and Sumit Roy, Senior ETF Analyst, are joined this week by Cinthia Murphy, Investment Strategist at TMX VettaFi; Jeffrey Ptak, Managing Director at Morningstar; and Mike Akins, Founding Partner of ETF Action. To watch the full conversation that includes a discussion on the lack of crypto bears, prediction market ETF filings, and more, go here. 

Private Equity Benefits Don't Translate for ETF Investors 

Nadig: Jeff, you and I have been writing a little bit about XOVR, a fund from ER shares, which is the big vehicle to try and play SpaceX. That's been their big push. And we've all been a little confused about how and why. And then they put out a whopper last week. Can you give us the very, the quick and dirty if there is one on what is going on with XOVR in their SpaceX position?

 Ptak: Yeah, so they've held SpaceX since December 2024. They've been adding to it over time. And I think one of the enduring mysteries has been why XOVR doesn't seem to have accrued more benefit because, as we know, SpaceX's valuation has taken off. And so it stands to reason that investors in XOVR would confer some of those benefits. 

Yet based on work that I and some others have done, it doesn't appear that XOVR shareholders have been beneficiaries of that run. And so the question was, why did that seem to be so? And, you know, best we can ascertain it's the public stocks that XOVR is a crossover ETF. 

So roughly 80-90% is going to be tucked away in publicly traded stocks, the balance in privately held securities, mainly SpaceX that makes up almost the entirety of the privacy sleeve. And from the work that, you know, myself and others have done, we've found that it's those public stocks that have driven XOVR's performance, not the much higher private sleeve. So, you know, in terms of why that might be so, there's a few sort of theories, I suppose, that I posited. 

One is owner's fees; as we know, it can be quite expensive to invest in special purpose vehicles of the sort that XOVR was using. Another possibility, and they're not mutually exclusive, it could be both of these things, is that it was very, very dilutive to invest through SPVs, best we can tell.

These were nested SPVs and see, as you can imagine, as you work your way down eventually to where the actual SpaceX shares reside, it could be that you're seeing that your proportional interest in those shares is dwindling, dwindling, dwindling to the point that it negates some of the benefits of ownership. But it's been a poor performing ETF, despite the fact that it's had exposure to one of the hottest privately owned securities that exists. And so that's been something that we've been trying to get to the bottom of here.

Nadig: Do we really know what's going to happen to this fund or frankly, any of the other vehicles that now have SpaceX positions? Baron obviously has a position in theirs. We have a bunch of mutual funds that have positions in SpaceX. What's really gonna happen when SpaceX goes public? Do we actually know what the impact on these funds is gonna be?

Ptak: I don't think we do. We've gotten sort of a miniature test case. They did own a small position. Their cost basis is around $2 million in Klarna. So they owned it pre-IPO through the IPO. They're still in the SPV. So they're not marking it, but they're still in the SPV. And so it could be that, you know, given the terms of their ownership in the SPV, that it basically precludes them from redeeming and owning the shares outright. 

I don't — we know very little about the SpaceX SBV and terms and whether or not they would have liquidity at the time the IPO happens. So guess we'll have to wait and see. I think the onus is definitely on the manager to be forthcoming about the terms of their ownership, the fees, how it is they're valuing the position, something that they have not been to this point.

Negating the Benefits of ETFs

Nadig: Yeah, has anybody else taken a look at these? Is this a topic that's been coming up in other conversations? Cinthia, is this something you guys have been looking at at all? Because certainly private equity in public vehicles is a topic of the day.

Murphy: Yeah, but I think we've kept it at a broader level and it's just a growing conversation about whose role is it really to clarify risks. And we have that conversation even in the derivative space – options based ETF – as that space proliferates. 

As our ETFs are getting more and more complex, you know, the conversation keeps coming up between advisors and asset managers that they don't really understand this risk or who is really getting down to this stuff. So this is a great example of that. And when the asset manager is not actually stepping up to clarify this, then who's holding that puck? So that's the conversation we're having internally.

Nadig: Yeah, and I think this also my concern about this is that one of the great benefits of ETFs, frankly, since the 90s has been transparency. You can look inside, you can see what you own. And this fund in particular seems to just be blowing that up because not only do we not really know what they own, which SPV, what are the costs exactly — we don't really even know what the SpaceX exposure looks like. 

We don't know whether the thing that they own is locked up for six months, is locked up forever, has a carry underneath it. We have these hints from the press release, but boy, if there was ever a caveat emptor buyer beware situation, it would be trying to get access to things like this through a public vehicle. 

So if you guys are going after this out there in ETF land looking for exposure to SpaceX, I hope you do your homework because Jeff and I have been doing our homework. We haven't been able to figure this out either, and we know a little bit about ETFs. And if we can't figure it out, it's probably too hard to figure out.

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