The SpaceX ETF That Traded Before SpaceX Did
Defiance’s drama on SpaceX’s IPO day gives new meaning to the word, “frontrunning.” Lara Crigger breaks down the first-of-its kind overnight change of an ETF’s strategy and what it could mean for the industry going forward.
For a brief period on Friday morning, it was possible for retail investors to buy a SpaceX ETF before they could even buy SpaceX stock.
On Friday, the Defiance Pure Space Daily 2X Strategy ETF (SPCL), which began life as a leveraged thematic fund, was transformed literally overnight into an ETF designed to provide 2x daily exposure to SpaceX, which had its IPO on the same day.
The move was a clear attempt by Defiance ETFs to secure first-mover status in what’s shaping up to be one of the largest single-stock ETF feeding frenzies ever. So far, 11 SpaceX-linked leveraged and inverse ETFs have launched Monday (June 15) already, with more to come in the following days.
But Defiance’s gamble also raises questions about how far issuers can reasonably stretch an active fund’s mandate to capitalize on a market event.
A SpaceX ETF Before SpaceX Trading Began
On June 12, the day of SpaceX's long-awaited IPO, Defiance ETFs announced that SPCL had changed its mandate from 2x leveraged exposure to space stocks in general to specifically SpaceX Class A shares, making SPCL "the first and only U.S. ETF to have 2x exposure to SpaceX on IPO day."
That mattered because all other issuers that had filed for leveraged/inverse SpaceX ETFs had been forced to delay launches until the first trading day after the IPO—i.e., today, Monday, June 15—after the SEC expressed concerns that “coupling the ETF launches with leveraged products could complicate the SpaceX debut,” reported Reuters.
Defiance found a workaround. Rather than launching a new ETF, it repurposed an existing one: SPCL.
In April, the fund had launched as XAIL, the Defiance Pure Space Daily 2x Strategy ETF, an actively managed, leveraged fund focusing on companies in the space industry. Then on June 10th, Defiance amended its prospectus to allow SPCL’s portfolio to reconstitute around a single company following a major industry event, deemed in the prospectus as a “Material Space Event.”
SpaceX’s IPO qualified, and SPCL subsequently began trading at Friday’s opening bell as a SpaceX-linked fund.
In an interesting twist, many retail investors attempting to buy the SpaceX stock itself on the open market found they couldn’t actually trade shares, due to overwhelming order volume. Access issues persisted all morning—meaning that, for several hours, SPCL was the only SpaceX exposure available for retail investors. For many, the ETF (which uses total return swaps and other derivatives to gain exposure) was available to buy before the actual stock.
Within roughly two hours of the opening bell, the fund traded nearly 1 million shares and more than $50 million in volume—around 100 times its normal activity, according to estimates from Bloomberg Intelligence’s Senior ETF Analyst Eric Balchunas.
“Wow, what a morning,” Balchunas wrote on X.
Then Came the Halt
The excitement did not last. At approximately 10:45 AM Eastern Time, trading in SPCL was halted by Cboe BZX Exchange.
In a subsequent statement, Defiance said the exchange had exercised its “broad discretionary authority” to halt trading and indicated that trading was expected to resume no earlier than Monday, June 15.
The issuer said it believed “the temporary halt of trading in SPCL shares was in response to today’s significant market price volatility” surrounding SpaceX’s IPO.
By that time, however, SPCL had already become one of the day's most actively traded ETFs.
A Familiar ETF Playbook—With A Twist
While unusual, Defiance's maneuver does have historical precedent. An ETF changing its investment mandate is nothing new; issuers have occasionally repurposed existing, mostly dormant funds as shells for a new strategy, enabling them to gain advantages in speed and scale.
One of the most famous examples came in 2017, when ETF Managers Group transformed a little-known Latin America real estate ETF into what became the industry's first marijuana ETF. Rather than waiting for approval of a new product, ETFMG reskinned its fund LARE into MJX (later MJ), a conversion allowed it to leapfrog competitors—and the SEC—to market and capture substantial early assets. (Read: "When An ETF Changes Its Exposure").
Since MJ’s debut, several issuers have deployed the same basic strategy of recycling an existing, stagnant ETF that they’ve already spent the cost and resources to launch into something new (usually with much far less drama, however).
What makes SPLC’s story unique is the speed of that transition. As an actively managed ETF, SPLC’s managers have significantly more discretion over portfolio changes than an index-based ETF would possess.
Typically when an ETF changes its strategy, it’s legally required to send a notice to shareholders 60 days in advance of the switch. But Defiance’s June 10th prospectus change, which added the “Material Space Event” provision that ultimately enabled SPCL’s transformation, specifically indicated no such notice would be forthcoming: “The Adviser will not provide advance notice to shareholders prior to any such changes.”
As far as we can tell, this particular approach to ETF recycling hasn’t yet been attempted. While it wasn’t successful—this time—it could set a new precedent for how active managers approach fund makeovers in the future, however.
Two Defiance SpaceX ETFs Enter…
The scramble reflects the enormous opportunity surrounding SpaceX. At least 25 SpaceX-related filings from 14 ETF issuers have been submitted, not counting the existing space industry ETFs, like the $3.3 billion Tema Space Innovators ETF (NASA) and the $1.1 billion Procure Space ETF (UFO), or the megacap ETFs that must now buy up SpaceX stock due to their indexing rules. (Read: SpaceX IPO: Every ETF That Will Hold SPCX—And When)
Though SPCL was halted on Friday, the fund is once again available for trading and already seeing massive volume on its first day back.
However, Defiance’s planned SpaceX ETF, the Defiance Daily Target 2X Long SpaceX ETF (SPCU), has also begun trading. Meaning that as of Monday afternoon, Defiance has two 2x leveraged ETFs tracking the exact same stock.
Will Defiance change SPCL back to its previous strategy, now that the moment to seize first-mover advantage has passed? If not, which of the two Defiance SpaceX ETFs will investors choose, if either?
How all this resolves remains to be seen.
