Investors have a new way to play a fast-growing market for special purpose acquisition companies, or SPACs:
Defense NextGen SPAC Derivative
exchange traded fund. It debuted on the New York Stock Exchange on Thursday under the ticker SPAK.
The ETF comes during the record year for SPAC: 116 initial public offerings have increased revenue by nearly $ 44 billion – over the last five years, according to SPAC Insider data. Sometimes called “blank-check companies”, SPACs go public in the form of cash shells, identifying an operating business to merge with sponsors later. Shares in SPAC once converted into shares in the target company.
Some of the best-performing stocks of 2020 were the results of the SPAC merger. They include
(DKNG), and more recently-till
(NKLA). The first two are among the top holdings of SPAK ETF
Vivint Smart Home
(LPRO). Nicola was booted from the index on Wednesday.
The ETF’s tenth largest position is an active SPAC: Churchill Capital III (CCXX). SPAC, valued at $ 1.1 billion, announced a deal in July to merge health insurers with software and services provider Multiplan at an enterprise value of $ 11 billion.
SPACs and companies must have a market capitalization of at least $ 250 million to create the index. It excludes dozens of SPACs with small trusts. SPACs often deal with the total value of their trust. According to SPAC Insider, the average SPAC IPO brought $ 379 million in 2020, to $ 231 million last year. Bill Ekman’s $ 4 billion
Pershing Square Tonight Holdings
(PSTH) brings the 2020 average.
Some SPACs may also struggle to meet ETF’s minimum liquidity limits. Indxx plans to rebalance the index at the end of July, but may also add SPAC IPOs at the end of January, April and October. Companies after the SPAC merger can join on the last business day of any month.
There is a potential for low allocation to search for SPACs as their stocks do not run very high. In practice, SPACs rarely trade below their belief values. This is because at the time of the merger of SPAC, shareholders have the option to redeem their shares for a proportionate share of the cash in their trusts – typically whatever little interest was accrued since SPAC’s initial public offering , That’s $ 10. Outside of periods of extreme market tensions in March, it leads to the floor where SPAAC shares the business.
However, some SPACs of high-profile sponsors trade above their trust values. Investors believe the team will hold a lucrative merger with an operating company that will cost more than cash. In fact, some do and some don’t – the range of performance is as wide as with traditional IPOs. Variation through ETFs can mean that extremes cancel each other out.
After the SPACs announced their goal and eventually closed the deal, their historical performance is mixed. A Goldman Sachs study earlier this year found that SPACs outperformed the market in the month and quarter following their deal announcements, but after the merger was completed, new stocks lagged behind. This is the group that gets 80% weight in SPAK ETF.
Some post-announcement, Premager SPACs that have significantly outperformed the market
(SHLL), which closes its deal with Hyliion on Thursday;
(DPHC) with Lordstown Motors; And
Social Capital Hedosopia Holdings II
(IPOB) with Opendoor.
Baron’s How to invest in SPACs recently and what factors to consider.
Canadian investors had access
Expeditious arbitration fund
(ARB.Canada) from April. It employs an actively managed SPAC merger arbitration strategy. The ETF has returned about 14% since its inception, versus a 23% return for
In the same period.
SPAK ETF has an expense ratio of 0.45%. Other ETFs from Defiance include 5G-centric
Defense Next Gen Connectivity ETF
(FIVG) and the
Junior Biotech ETF
(IBBJ). The company first applied for the SPAC ETF in late July.
The ETF said in a statement, “It can be very difficult to choose the winners of individual SPACs, although the ETF structure allows investors to access the most liquid SPAC IPO in a diversified basket.” “SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investment, which until now was only available to large financial institutions.”
After pricing at $ 25 per share, the SPAK ETF opened at $ 25.74 on Thursday. It opened at $ 26.15, up 1.6% from its opening and up 4.3% from where it was priced. The S&P 500 rose 0.5%.
Write Nicholas Jasinski at [email protected]