SPAC momentum persists with exchange-traded fund investments as regulatory scrutiny arrives

Exchange-traded funds (ETF) that invest in SPACs are growing in number, including a new SPAC ETF that will provide inverse exposure. Meanwhile, adjustments to holdings of a space ETF demonstrate SPAC optimism.

Comments from the US securities regulator highlight concerns regarding the de-SPAC moment...

Exchange-traded funds (ETF) that invest in SPACs are growing in number, including a new SPAC ETF that will provide inverse exposure. Meanwhile, adjustments to holdings of a space ETF demonstrate SPAC optimism.

Comments from the US securities regulator highlight concerns regarding the de-SPAC moment, when a merger between a publicly traded SPAC and private operating company occurs.

Ark Invest’s Ark Space Exploration ETF (NYSE:ARKX) adjusted its holdings 7 April to increase SPAC exposure, highlighting continued enthusiasm for the finance trend in the space sector.

The ETF launched on 30 March, and said in a statement it “believes that satellite broadband revenues could approach USD100bn annually over the next five to 10 years. Hypersonic point-to-point travel could add another USD270bn in revenues annually.”

The ETF’s top holding at launch was connectivity solution provider Trimble (NASDAQ:TRMB), alongside industry stalwarts such as Boeing (NYSE:BA) and Airbus (EPA:AIR), as well as SPACs Atlas Crest Investment Corp. (NYSE:ACIC) and Reinvent Technology Partners (NYSE:RTP). Surprises included Netflix (NASDAQ:NFLX) and Ark’s own 3D Printing ETF (BATS:PRNT). The stock of Kratos Defense and Security Solutions (NASDAQ:KTOS) jumped 6% on 29 March on news that it was the fund’s third highest holding.

According to some observers, Ark Invest missed good opportunities provided by smaller companies. Satellite stocks covered by Raymond James “are predominantly small cap companies ( Iridium Communications (NASDAQ:IRDM) has the largest market cap at [about USD5bn]),” wrote analyst Rick Prentiss in a note, “while about 90% of ARKX holdings have market capitalization greater than USD2bn.”

“All in all, while the lack of inclusion of most of our satellite names was disappointing for some investors, we believe increased investment in space-related stocks is a long-term positive for the industry, especially by such a high-profile name as ARK,” Prentiss concluded.

On 7 April, ARKX added Jaws Spitfire (NYSE:SPFR), a SPAC that is merging with 3D printing company VELO3D , while also increasing holdings in SPACs Atlas Crest Investment Corp. and Reinvent Technology Partners as well as in Iridium Communications , according to a tweet by CNBC reporter Michael Sheetz.

Ark Invest decreased holdings in manufacturing, selling shares in defense contractor AeroVironment (NASDAQ:AVAV), agricultural manufacturer Deere & Company (NYSE:DE), test equipment maker Teradyne (NASDAQ:TER) and Taiwan Semiconductor Manufacturing Co. (NYSE:TSM).

Other space ETFs have different strategies. The Procure Space ETF (NASDAQ:UFO) from ProcureAM weights companies according to revenue derived from the space sector, CEO Andrew Chanin recently told ConnectivityBusiness .

He added that the arrival of ARKX brought validation to the space ETF concept. As of 31 March 2021, Procure Space ETF had USD130m in net assets, Ark Space Exploration ETF had USD350.8m, and the SPDR S&P Kensho Final Frontiers ETF (NYSEARCA:ROKT) had USD24m, according to data from Morningstar Direct provided to Connectivity Business.

Other SPAC ETFs emerge

Investor appetite for SPACs is served in part by three new ETFs that invest in SPACs. The first was the Defiance NextGen SPAC IPO ETF (NYSEARCA:SPAK) from Defiance ETFs, which launched on 1 October 2020. The SPAC and New Issue ETF (NYSEARCA:SPCX) from Tuttle Capital Management launched on 16 December 2020. And the Morgan Creek-Exos SPAC Originated ETF (NYSEARCA:SPXZ) from Morgan Creek Capital Management launched on 26 January 2021.

Now Tuttle is also planning two ETFs focusing on the stock of de-SPACed companies. One offers a long position and the other offers a short position.

“There is no easy way to get inverse exposure to these types of companies,” Tuttle Capital Management CEO Matthew Tuttle told Connectivity Business.

He added that any SPAC ETF should be actively managed. In addition to selecting SPACs when the ETF launches, an actively managed fund can track changes to the SPAC market. “Index funds risk becoming obsolete, which is not going to happen in an actively managed fund,” Tuttle said.

Tuttle added that some SPAC issuers are on their second, third, fourth or fifth SPAC and therefore have a track record.

The returns on the three ETFs since inception support his assertion that active management pays off, with his SPCX registering a total return since inception of 14.2% compared to SPAK at 4.72% and SPXZ at -16.10%, as of 31 March 2021, according to the Morningstar Direct data.

Pre-merger SPACs are trending down toward net asset value (but not below it), “which we see as healthy,” said Pitchbook Data senior analyst Cameron Stanfill in a webinar on 14 April.

SPAC enthusiasm is global with a USD4bn PIPE investment in Singapore-based Grab , a company that offers everything from banking to food delivery in a single app, announced 13 April. The PIPE investment values Grab at a record-breaking USD39.6bn and is led by five firms: BlackRock (NYSE:BLK), Fidelity , T. Rowe Price (NASDAQ:TROW), Morgan Stanley ’s (NYSE:MS) Counterpoint Global fund and Temasek , which is Singapore’s sovereign wealth fund.

The small share of Grab on offer resembles venture capital more than previous SPACs, said Stanfill.

SEC scrutiny of the de-SPAC moment

Meanwhile, the US SEC is concerned about investor rights at the de-SPAC moment.

“If a major shift in owners is in fact occurring in most or all SPACs as they progress through a de-SPAC, it is the de-SPAC as much as any other element of the process on which we should focus the full panoply of federal securities law protections,” said SEC acting director for the division of corporation finance John Coates in a 8 April speech.

Coates added in a statement on 12 April that he is concerned about the cash reward to PIPE investors that is incorporated into the terms of warrants issued by SPACs, warning that the cash impact would need to be disclosed, where “all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash.”

“[Staff in the office of the chief accountant (OCA)] concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings,” Coates explained.

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