[Editor’s Note: This article was one of ETF.com's most popular of 2021.]
Special purpose acquisition companies (SPACs) have enjoyed a surge in popularity in the past 18 months or so, and ETF issuers have been quick to dive into this space. Three different SPAC ETFs have come to market in the past four months, each offering a unique take on this segment.
SPACs are so-called blank check companies that raise capital specifically to find a deal, and merge with or acquire another company that wants to go public.
They are essentially an avenue into public markets for companies that can’t or don’t want to go through a traditional, more regulated initial public offering (IPO) process. A SPAC has to seal a deal within 24 months of its creation, or the capital raised must be returned to investors.
Behind An Improving Reputation
Historically, SPACs have been associated with lower quality companies—names that simply didn’t meet an IPO’s criteria. But that has changed over time. Today everyone seems eager to jump into the SPAC opportunity.
That has happened for a couple of reasons. First, because SPACs have been growing more specialized, they are finding more success in bringing together the right teams with the right expertise to the right areas. That has translated into a higher success deal rate over time.
According to Morgan Creek’s Mark Yusko—the latest to enter this space—as recently as 2010, 60% of all SPACs failed to find a deal. That dismal rate of success improved over the years, and by 2015, only 20% of SPACs failed to close a deal.
In 2020, zero SPACs failed. Each one succeeded, which is significant, considering SPACs raised a record amount of money in 2020—some $81 billion—and today the universe of SPACs comprises about 250 different companies.
“I call 2020 the year of the SPAC: a record for number of SPACs, record capital raised and one of every four IPOs was a SPAC,” Yusko said. “That’s a good thing. If you think about the IPO process, it’s not designed for the benefit of the average investor. The IPO pop is the most egregious example of that. SPACs democratize access to great businesses.”
The other factor helping change the landscape for SPACs is the caliber of the players who have entered the space. SPACs are becoming a well-known billionaire playground.
Think of names like Chamath Palihapitiya, who’s already raised a handful of SPACs in recent months, landing deals with Virgin Galactic, Opendoor and Clover Health. Richard Branson just raised a SPAC with eyes on 23AndMe. Bill Ackman is out there. The list goes on.
As this space heats up, ETFs are popping up to offer investors access to these companies.
The first three SPAC ETFs that have come to market couldn’t be more different from one another. Put simply, your choice boils down to this: a passive index-based ETF; an active SPACs-only ETF; and an active SPACs plus post-merger-companies mix.
Consistent across these portfolios are the risks associated with SPACs. As Palihapitiya tweeted recently, success in this space is not a given.
That said, from an investment perspective, SPACs are an interesting beast because their risk profile is quite unique for a company.
In its pre-deal phase, a SPAC behaves almost like a fixed income substitute. SPACs are issued at $10 a share, and that $10 goes into a trust where it sits until a SPAC lands a deal. If the SPAC doesn’t make a deal, investors get that $10 back, plus interest.
Given that SPACs today seem to go after some of the most disruptive, tech-savvy companies looking to go public, investing in a pre-deal SPAC now is almost like investing in defensive growth, if there ever was such a thing.
So, here’s what to consider when evaluating existing SPAC ETFs. (You can compare any of two ETF portfolios side by side by entering the respective tickers in our ETF Comparison Tool).
Index Choice: SPAK
The first-to-market ETF, the Defiance Next Gen SPAC Derived ETF (SPAK), is an index-tracking fund that invests in both U.S.-listed SPACs and SPAC-merged companies.
SPAK is the only index-based SPAC ETF in the market. The mix, which takes into account market cap, free float and liquidity requirements in its selection process, is a 20/80 mix: 40% of the portfolio are SPACs and 60% are post-deal companies.
SPAK is a market-cap-weighted portfolio, so you’ll find the biggest deals at the top.
For a larger view, please click on the image above.
The index rebalances annually, but the methodology allows for SPACs and post-deal companies to be added with more frequency if needed.
You could argue that one of the benefits of SPAK being an index fund is that it removes manager risk from the equation. It offers broad access to the space with a rules-based approach. No surprises.
The fund, which launched last fall, has $78 million in assets under management and costs 0.45% in expense ratio, or $45 per $10,000 invested. Since inception, SPAK has gained almost 30%.
Actively Managed SPAC-Only: SPCX
The SPAC and New Issue ETF (SPCX) is an actively managed fund that invests only in pre-deal SPACs, and it’s run by Tuttle Tactical Management.
SPCX was the first actively-managed SPAC ETF to come to market, and it stands out for its focus on the SPACs themselves.
The investment thesis behind this strategy is that Tuttle and his team will find the best SPACs out there, as in those that are successfully putting together deals with strong teams, and therefore, offering solid capital appreciation as deals are announced. The fund doesn’t hold the post-merger company, however.
The selection process, according to Matthew Tuttle, centers on two factors: who’s the management team behind the SPAC; and what’s their track record, as well as valuations. The mix today has about 88 holdings, led by Churchill Capital Corp (CCIV) at a 5% weighting, Starboard Value Acquisition (SVACU) at 4.3%, and Decarbonization Plus Acquisition (DCRB) at 3.7%.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
“SPACs have a $10 floor, but they can get really hyped up,” Tuttle said. “For example, Bill Ackman launched a SPAC five months before our fund came out and was trading at $30 a share. Ackman is a smart guy, but trading at $30; so we are not going there.”
“In the ETF, we love to buy on weakness,” he added. “We’re constantly looking at new SPACs coming out, constantly evaluating the mix and if there’s no buzz or rumor, we may want to get out of that position.”
SPCX launched just over a month ago, and it has $153 million in AUM. It costs significantly more than its passive counterpart, at a 0.95% expense ratio, which isn’t uncommon for actively managed ETFs. Since inception, the fund has rallied 28%.
Active Equal-Weight Mix: SPXZ
The newest ETF to come to market in this space is the Morgan Creek – Exos SPAC Originated ETF (SPXZ). SPXZ is an actively managed ETF run by Mark Yusko and his team, and invests in pre- and post-deal SPACs. Fintech firm EXOS Financials is the subadvisor.
Like Tuttle, Yusko is a big believer in the power of active management in this burgeoning space. The ETF picks from a SPAC universe that today comprises about 250 different names, focusing on finding value opportunities.
But SPXZ is notably different from Tuttle’s SPCX in two key ways: First, SPXZ is a mix of SPACs and post-deal companies: one-third of the mix is SPACs only; two-thirds of the mix is post-deal companies. Secondly, SPXZ is an equal-weighted portfolio, offering deeper diversification that way.
Yusko is looking to find the “companies of tomorrow,” as he put it, and plans to hold onto these names for as long as they are viable. SPXZ has no rules as to how long a security may sit in the portfolio. Current names in the portfolio include Skills Inc. (SKLZ), Virgin Galactic Holdings (SPCE) and Danimer Scientific (DNMR), each representing about 2% of the mix.
“Our goal is to hold for a long time,” Yusko said, noting that in Amazon’s 21-year history as a public company, it’s never been the “right time” to sell because it remains an innovative, disruptive company despite the volatility.
“If we are successful, we expect to hold onto these post-deal companies for a very long time as we find the Amazons of tomorrow,” he explained. “High growth companies will have volatility, and we don’t want to be shaken out by it. Volatility is your friend long term. Your only enemy in investing is downside volatility, but we can manage that by position-sizing, diversifying our portfolio across industries and sectors.”
SPXZ, which has 89 holdings right now, has nearly $32 million in assets gathered since its launch on Jan. 20. The fund costs 1% in expense ratio. Since inception, the fund has climbed over 6%.
Charts courtesy of Bloomberg
Choose What’s Right For You
As is always the case in the ETF market, there’s no universally right or wrong ETF choice, simply the right or wrong ETF choice for you.
This new segment of ETFs is a perfect example of funds navigating a similar universe, but delivering very different rides. As more ETFs enter this space—something we all expect to see—the need for due diligence only grows. We at ETF.com offer several free-to-use tools and fund data pages to help with that homework.
Contact Cinthia Murphy at [email protected]