Defiance ETFs: First Mover In SPACs

At the end of 2020, Defiance ETFs led the charge into the Special Purpose Acquisitions Corporation (SPAC) corner of the investment world. The firm was quickly followed by competitors looking to capitalize on the attention the asset class was getting. SPACs are similar to IPOs, but a SPAC corporation is formed with the express purpose of orchestrating the listing of yet another company. The Defiance Next Gen SPAC Derived ETF (SPAK) is the first and only index-based ETF offering exposure to the SPAC universe. Here, Defiance CIO Sylvia Jablonski digs into the question of why investors should care about SPACs and what sets Defiance’s ETF apart from the rest of the pack.

ETF.com: What is the investment argument for something like a SPAC?
Sylvia Jablonski: 2020 was a record year for SPAC IPOs in general. There were 248 stocks that went public via a SPAC vehicle with about $80 billion of proceeds, as compared to about 59 SPACs with $13 billion in 2019. 2020 experienced close to a 400% growth rate. 2021 is off to a strong start too, with over 56 new SPACs and approximately $16 billion of proceeds in the first three weeks. Compare that with $4 billion in traditional IPOs during the same time period.

What this tells us is that there is a massive ongoing appetite for next-generation sector investing in the private equity and IPO space. Investors are looking for innovation, disruptive technology, the companies that are going to change the way we live in the future. A lot of those companies are hidden or newly launched in the pool of new listings.

Last year saw over 50% of new listings launched via the SPAC vehicle. This IPO euphoria is continuing, and the reason I think a lot of companies are also going the SPAC route now is because the traditional IPO process is more cumbersome. It takes more time, there are more reporting requirements and hurdles to jump over in order to get to market. SPACs are more cost efficient, timely and practical, particularly in the current environment.

I believe that banks have some of their cash tied up because of expected loan and fiscal support around a COVID resurgence policy. If you were looking for IPO funding, it might take some time to get the balance sheet. Also, the classic roadshows aren't going to happen. All of the traditional things that you're paying for and partnering with a bank for in a traditional IPO aren't really as appealing today. But you have the alternative option of going to market very quickly, through a SPAC.

Defiance came out with a SPAC ETF because we wanted to help democratize access to the IPO world, the private equity world, and M&As for the average investor. SPACs are a part of that club, but they offer access at an even earlier starting point to both the pre-IPO (blank check), and post-IPO companies.

SPAK was the first ETF to provide exposure to this new and exciting space, and it continues to offer the most efficient access to the most liquid and popular SPAC names in one place.

ETF.com: What are the different opportunities a SPAC offers?
Jablonski: A SPAC gives an investor access to a blank check company, which is established in order to make an acquisition. This gives an investor the chance to be part of the entire IPO life cycle. He or she can benefit if there is enthusiasm around the company—its leadership, for example. Social Capital and its various SPACs are wildly popular due to the exciting mergers that they’ve completed.

With an IPO, an investor could really only get access to the second party of the public listing cycle, where the stock is listed and trading in the secondary market. What is great about the ETF SPAK is that it looks at the process holistically, and allows you to access the entire IPO life cycle and benefit from the growth or success of both the SPAC company making the acquisition and the target company being acquired.

Companies that go public via the SPAC vehicle are growing enormously in popularity. Because of that, top leadership and funding is being allocated to these vehicles, which then lead the search for some of the most innovative and exciting companies and sectors that we are seeing come to market. Virgin Galactic and Draftkings are two recent examples. These names have provided significant returns for investors, and they open up the possibility for a basket of names just like this, to continue being a source of returns for investors.

I also believe the trend will stick around with the current market conditions at the micro and macro levels. We are in an environment that's going to continue to support the popularity of SPACs—especially with interest rates so low and likely to stay low.

Furthermore, there's flexibility in the SPAC offer. Investors can decide not to let a stock do a merger. They can pull out of it. They can get their money back. I think the SPAC vehicle will continue to be popular, and because of that, the SPAC vehicle will lead to new and exciting mergers that are accessible to retail investors.

ETF.com: What spurred this excitement about SPACs?
Jablonski: SPACs have been around forever. However, their credibility was boosted by experienced participants in the space like Chamath Palihapitiya, Michael Klein, Bill Ackman, Goldman Sachs—very solid, well-known companies that are well funded, and have leaders with strong track records of success.

Social Capital, which is led by Palihapitiya, for example, has formed several SPACs. One of them was allocated to merge with Richard Branson’s Virgin Galactic; the other recent exciting announcement was around SoFi. Everything that Chamath touches has turned to gold, and so investors are willing to invest in an ETF that gives exposure to his potential targets. His company creating a blank check is credible to investors. They want to get in on that investment at the ground level.

A lot of the excitement has also been propelled by low interest rates and the fewer regulatory requirements, in terms of financial statements, projections and things like that. The rules are far more flexible with a SPAC.

ETF.com: What sets apart the Defiance SPAC ETF?
Jablonski: Our index gives investors access to the entire spectrum of the merger and listing as it unfolds. It includes SPACs in the pre-merger phase—or the blank check stage—and that has a 40% weighting. For the other 60%, the allocation is to post-IPO SPACs. And those are names the index will hold for two years following the merger.

What's different about SPAK, as compared to the other products out there, is that it gives investors access to the entire life cycle of the SPAC IPO process. You're getting the blank check company that will do the merger, and then you're getting the company that it merges with.

Furthermore, we look at the groups that have the most liquid and compelling innovative companies in the SPAC space so that we’re giving you access to the names that are the highest funded, that have the most stable market caps and the most stable ADVs.

It is, in my opinion, quite difficult to pick stocks in this space, particularly in the blank check space. One thing that we know is that higher market cap and liquidity levels have thus far been linked to the most experienced, successful and innovative management teams, and that is what our investors would like exposure to.

The output of the mergers, or the post-IPO names have also not disappointed. Look at Clarivate, DraftKings, Virgin Galactic, MP Materials as the most recent examples.

ETF.com: We’ve heard a lot about disruptive innovation in the last year or so. Does SPAK fit in with that theme?
Jablonski: I think if you look at the types of names that the blank check companies are going after, they're very much disrupters, whether it's in health care or fintech or the space race or online gambling.

The first SPAC ever brought Burger King to public status. The names we’re seeing now are very different. Although they touch various sectors, there seems to be a common theme of innovation and a new way of doing things, seeking technology that improves the way we live.

It goes back to the popularity propelled by the credible and experienced backers, and the funding they bring. There are some very smart management teams in the SPAC area. It's the innovation in the merger target and the proven credibility of the backers and the leaders in the space that are making the difference.

ETF.com: Could you provide an overview of the methodology, or some of the highlights?
Jablonski: The index weights companies in the pre-merger stage at 40% and those post-merger companies at 60%. No security in the index can have a weighting higher than 12%. And individual stocks with weightings of 5% or more are capped at an aggregate weight in the index at 45%.

Right now, there are 111 names in the index. Each company must have at least $250 million in market capitalization and an average daily value traded of at least $1 million. To be included, a stock must have at least three months of trading history and have actually traded on 90% of those days.

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 833.333.9383 or going to www.defianceetfs.com.

Investing involves risk. Principal loss is possible. The Fund invests in companies that have recently completed an IPO or are derived from a SPAC. These companies may be unseasoned and lack a trading history, a track record of reporting to investors, and widely available research coverage. IPOs are thus often subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection with the IPO prior to inclusion in the Index. The price of stocks included in the Index may not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition, IPOs may share similar illiquidity risks of private equity and venture capital. The Fund is new with a limited operating history.