Space ETFs Land At Right Time

Virgin Galactic made history last Sunday by launching the first passengers, including billionaire founder Richard Branson, into space. This event marks a major step forward for the growing space tourism industry.

Though Virgin Galactic suspended ticket sales after a fatal 2014 accident that resulted in design changes to the spacecraft, many have already paid up to $250,000 to secure their tickets on a future ride. The company plans to reopen ticket sales later this year.

The year-to-date stock chart resembles space flight, having crashed to negative territory in April and May. SPCE (Virgin Galactic’s ticker) is up nearly 34% compared to 16.7% for the S&P 500.

Courtesy of StockCharts.com

Space ETF Options

Several ETFs offer exposure to this innovative industry and have been beneficiaries of SPCE’s meteoric rise this year. The Procure Space ETF (UFO) tracks a tier-weighted index of aerospace companies located globally, and was the first fund to offer pure-play exposure to the space industry.

The SPDR S&P Kensho Final Frontiers ETF (ROKT) offers exposure to equities involved with space exploration as well as the deep sea. Approximately 65% of the portfolio is allocated to companies involved solely in space exploration, while 5% offers exposure to companies involved solely in deep sea exploration. The remaining 30% of the portfolio is allocated to companies involved with both industries.

The ETF Comparison Tool highlights the similarities and differences between these funds. ROKT was first to market, launching in October 2018, but UFO has gathered nearly 6x as many assets in spite of its higher fee.

Both ETFs are fairly concentrated, with less than 40 holdings and around 40% or more held within the top 10 names. Only two of the top 10 holdings overlap between the two funds.

Different Ways To Define the Universe

UFO and ROKT both offer exposure to companies involved in space exploration, but each has their own way of defining what that means. UFO predominantly invests in companies that receive at least half of their revenue or profits from one or more segments of the space industry.

ROKT’s space-related holdings are derived from the S&P Kensho Space Index, which tracks companies that produce products and services that enable space travel and exploration, or that are involved with the supply chain for these products and services.

The resulting portfolios are quite different, with ROKT holding 56% of the portfolio in aerospace and defense names. Though companies in this industry are involved with the creation of products and services that enable space exploration, it is not necessarily the main focus of their business. This means that price movement can be driven by other factors such as changes in defense spending.

UFO’s focus on companies that derive most of their revenues from space-related industries means that it holds a higher weighting in companies involved with satellite communication technology. One holding in particular, Globalstar (GSAT), has gained 331% this year, boosting UFO’s performance over the year-to-date.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

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ARK Offers Active Option

Though UFO was the first pure-play space ETF, the ARK Space Exploration & Innovation ETF (ARKX) launched earlier this year, boldly going where no ETF issuer has gone before. ARKX is the first actively managed fund to target the space exploration industry.

ARKX and UFO both have an annual expense ratio of 0.75%. In spite of ARKX’s newcomer status, it has gained assets at warp speed, gathering over $600 million since March. The fund’s size gives it an edge when it comes to cost with an average spread of 0.06% versus UFO’s 0.24%.

ARKX is also a highly concentrated portfolio, with over half of the portfolio in the top 10. Between UFO and ARKX, only two names overlap within the top 10 holdings. Virgin Galactic is not one of them. As of July 12, the stock was not held in the ARKX portfolio.

ARKX’s choice to not hold Virgin Galactic on Monday was a benefit. Its stock dropped more than 17% in one day after the company filed to sell up to $500 million in common stock. Trading in the stock was even briefly halted due to volatility.

But looking at ARKX’s performance since inception, the fund’s active mandate has not added value so far. Since inception, the fund has lost 1.4%, relative to a 3.2% gain for UFO over the same time frame.

Courtesy of StockCharts.com

Industry Outlook: To Infinity & Beyond

Though space-related ETFs have already had a good run this year, the outlook remains bright. Morgan Stanley predicts the revenue generated by the global space industry may increase from its current level of $350 billion to $1 trillion by 2040.

Morgan Stanley predicts that the most significant opportunities come from satellite broadband internet access, representing 50% of the projected growth of the space economy.

As with any thematic ETF, investors need to look beyond the name. Assessing how a fund or the index it tracks defines the universe is critical in understanding what factors might drive performance going forward. Should Morgan Stanley’s prediction pan out, UFO could live long and prosper with strong competing ETFs riding right behind.

Contact Jessica Ferringer at [email protected]