Investors have a new way to play in the booming market for special purpose acquisition companies or SPACs: the
Defiance NextGen SPAC derivative
exchange-traded fund. It made its debut on the New York Stock Exchange Thursday with the ticker SPAK.
The ETF arrives in a record year for SPACs: 116 initial public offerings have raised nearly $ 44 billion in revenues, more than the past five years combined, according to data from SPAC Insider. Sometimes called “blank check companies,” SPACs go public as cash hedges, with sponsors subsequently identifying a business to merge with. SPAC shares convert into target company shares when combined.
The SPAK ETF tracks the performance of the Indxx SPAC & NextGen IPO Index, but is not a perfect representation of the overall SPAC market. In fact, it’s more of an index of companies that went public via SPAC mergers. Those get an 80% weight in the index, while SPAC premerger make up the rest, according to a regulatory filing on Wednesday.
Some of the best performing stocks of 2020 were the result of SPAC mergers. Those include
(DKNG) and, until recently,
(NKLA). The first two are among the main holdings of SPAK ETF, along with
Vivint Smart Home
(LPRO). Nikola was removed from the index on Wednesday.
The 10th position of the ETF is an active SPAC: Churchill Capital III (CCXX). The $ 1.1 billion SPAC announced an agreement in July to merge with MultiPlan, a provider of software and services to health insurers, for a business value of $ 11 billion.
SPACs and companies must also have a market capitalization of at least $ 250 million to make the index. This excludes dozens of SPACs with smaller trusts. SPACs tend to do business with a total value of several times their trust. According to SPAC Insider, SPAC’s average IPO earned $ 379 million in 2020, up from $ 231 million last year. Bill Ackman’s $ 4 billion
Pershing Square Tontine Holdings
(PSTH) brings up the 2020 average.
Some SPACs may also find it difficult to meet the ETF’s minimum liquidity thresholds. Indxx plans to rebalance the index annually at the end of July, but may also add SPAC IPOs at the end of January, April and October. Subsequent companies to the SPAC merger can join on the last trading day of any month.
SPAC’s low research allocation is likely because their stocks don’t tend to move much. In practice, SPACs rarely trade below their trust values. This is because, at the time of a merger of a SPAC, shareholders have the option to redeem their shares for a proportionate share of the money they trust, usually $ 10 plus any small interest earned from the SPAC’s initial public offering. Outside of periods of extreme market stress such as in March, it tends to be the trading point for SPAC shares.
However, some high-profile sponsor SPACs trade well above their trust values. It is the investors who are betting that the team will put together an interesting merger with an operating company that is worth more than money. In fact, some do and some don’t – the performance range is broad, just like with traditional IPOs. Diversification across an ETF could mean that extremes cancel each other out.
After the SPACs announced their goal and eventually sealed the deal, their historical performance is mixed. A Goldman Sachs study earlier this year found that SPACs tend to outperform the market in the month and quarter following the deal announcements, but that after the merger was completed, new stocks tended to lag behind. This is the group that gets an 80% weight in the SPAK ETF.
Some post-announcement and premerger SPACs that have significantly outperformed the market include
Acquisition of turtle
(SHLL), which closes its deal with Hyliion on Thursday;
(DPHC) with Lordstown Motors; is
Share capital Hedosophia Holdings II
(IPOB) with Opendoor.
Barron’s recently wrote a cover story on how to invest in SPACs and what factors to look for.
Canadian investors have had access to the
Accelerate Arbitrage Fund
(ARB.Canada) from April. Uses an actively managed SPAC merger arbitrage strategy. The ETF has gained around 14% since its debut, compared with a return of 23% for the
during the same period.
The SPAK ETF has an expense ratio of 0.45%. Defiance’s other ETFs include 5G focused
Defiance Next Gen Connectivity ETF
(FIVG) and the
Junior Biotech ETF
(IBBJ). The company first unveiled the SPAC ETF at the end of July.
“Choosing the winners of individual SPACs can be very difficult, however the ETF structure allows investors to access the most liquid SPAC IPOs in a diversified basket,” Defiance ETF said in a statement. “SPAK allows both financial advisors and retail investors to participate in an IPO private equity investment style, which until now was only available to large financial institutions.”
After discounting $ 25 per share, the SPAK ETF opened Thursday at $ 25.74. It closed at $ 26.15, up 1.6% from the open and 4.3% above the price. The S&P 500 was up 0.5%.
Write to Nicholas Jasinski at email@example.com