February 15, 2021 BARRON’S 29
FUNDS
ETFs that invest in special purpose acquisition
companies might lessen the risk involved, but at a
pretty high price.
3 New ETFs Offer
Access to SPACs–
ButLookClosely
P
erhaps the hottest invest-
ment to come out of a
strange year for investing is
the special purpose acqui-
sition company, known as a
SPAC. These once-obscure
investment vehicles made
hedge fund legend Bill Ackman $1.4
billion in less than a year, and are now
backed by high-profile athletes such
as Shaquille O’Neal, Alex Rodriguez,
and Serena Williams, as well as other
celebrities like Grammy-award-win-
ning singer Ciara, astronaut Scott
Kelly, and music mogul David Geffen.
The star power is dazzling, but
SPAC ETFs can differ greatly, making
a difficult-to-understand and volatile
product even trickier to invest in.
SPACs are shell companies that
raise cash from investors through an
initial public offering. The money is
then used to acquire an existing (typi-
cally privately held) company, in order
to bring it public with less hassle, and
less scrutiny. Though SPACs have
been around for decades, 2020 saw a
strong resurgence. Many investors
like the trend toward popular themes
such as electric vehicles and green
energy, though the real appeal has
been the larger deal sizes and high-
profile sponsors. About 250 SPACs
raised $83 billion in 2020, six times
more than in the previous year. Just
six weeks into 2021, the numbers have
already reached about half of 2020’s.
SPACs can be attractive in that they
allow retail investors to participate in
an IPO before the actual listing—
something usually only available to
venture-capital or private-equity
firms—and potentially capture the big
gains if the newly public firm turns
out to be successful. But SPACs are
risky because early investors don’t
know what the merger target will be,
nor is a deal guaranteed at all.
That’s why SPACs are also called
blank-check companies. SPACs aren’t
backed by any real business operations,
yet investor anticipation for the next big
hit can sometimes drive the price high,
even before any deal is announced.
Essentially, investors are paying for the
reputation of the deal sponsor—and
that can be pricey. If the merged com-
pany doesn’t live up to expectations,
share prices could plunge.
A diversified exchange-traded fund
can mitigate some of the risk and
smooth the ride. Most, however, are
very new, quite small, and considerably
more expensive than the typical ETF.
The $106 millionDefiance Next
Gen SPAC Derived(ticker: SPAK) is
the only passive, index-tracking fund
devoted to SPACs. It currently has 136
holdings, weighted by market value.
All its holdings must meet minimum
liquidity and size requirements; the
fund charges 0.45% annually. “The
SPAC sponsors that can bring more
capital to the table probably have a
little bit more credibility and more
chances to succeed,” says Defiance
ETFs’ president, Paul Dellaquila.
The Defiance ETF allocates just
40% of assets to the newly listed pre-
merger SPACs. The remaining 60%
goes to the companies that became
public after merging with a SPAC.
Dellaquila says this can help offset
some of the volatility in the SPAC
market, and offer investors diversified
exposure to the postmerger stocks.
That strategy can limit perfor-
mance, however. While some stocks
derived from SPACs saw substantial
gains following their IPO—Draft-
Kings(DKNG), for example, rose by
216% since it went public last April—
others dropped sharply once the ini-
tial positive sentiment faded. Of the
115 completed SPAC mergers from
2016 to 2020, 65% of their stocks had
declined a month after the merger
closed, and 71% were down a year
later, according to a recent study from
Edge Consulting Group. The Defiance
ETF plans to hold postmerger stocks
up to two years after they go public.
Still, the fund has returned 31% in
the four months since its inception in
October, thanks to large positions in
Virgin Galactic(SPCE),Skillz
(SKLZ), andOpen Lending(LPRO),
as well as pre-merger SPACs like
Churchill Capital(CCIV). Despite a
nearly 10% position in DraftKings, it
missed most of the stock’s gains,
which occurred earlier last year.
The actively managed $179 million
SPAC and New IssueETF (SPCX),
launched in December by Tuttle Tac-
tical Management, is a purer play that
invests only in pre-merger SPACs.
For CEO Matthew Tuttle, SPACs are
a unique asset class and shouldn’t be
grouped together with the post-
merger stocks. “They are not even
cousins; they are totally different
animals,” he says, citing the different
methods of valuing and trading them.
The fund usually sells a SPAC after a
merger is announced. It charges
0.95% annually.
One of the big value-adds of an
active fund, says Tuttle, is that it can
subscribe to a SPAC’s IPO units at the
trust value price, usually $10, while
index funds and retail investors have
to purchase those shares later, in the
often slightly more expensive second-
ary market. Since SPAC shares can be
redeemed for $10 plus interest at the
time of the merger, the investment is
essentially guaranteed not to lose
money—other than a nick of infla-
tion—even in the worst-case scenario.
The $40 millionMorgan Creek
Exos SPAC OriginatedETF (SPXZ)
is a mix of the other two approaches,
and the most expensive, with a 1% ex-
pense ratio. Launched just a few weeks
ago, the fund is actively managed, and
invests in both pre-merger SPACs and
postmerger stocks. Morgan Creek
CEO Mark Yusko says he plans to put
one-third of the assets in the first
group and two-thirds in the latter; all
holdings will be weighted equally.
“People often say, ‘It’s so obvious Am-
azon is a winner,’ but that’s only in
hindsight,” says Yusko, “You don’t
want to make mistakes, and the best
way to manage that is position size.”
A
s the SPAC market matures,
the differences among these
exchange-traded funds is likely
to increase: The index-tracking
fund will likely include most of the
new names, while the active funds
become more selective. The funds are
also likely to adjust their allocations to
pre-merger SPACs and postmerger
stocks, depending on their relative
performance and volatility. The Defi-
ance ETF increased its allocation to
pre-merger SPACs from 20% to 40%
in January. Yusko also says that, if the
SPAC market becomes more active,
the Morgan Creek fund might allocate
more to pre-merger names than it
currently does: “We’re not gonna force
ourselves to follow the guideline; it’s
all about quality.”B
By Evie Liu
Blank-Check Investing Goes Mainstream
Investors can now buy special purpose acquisition Companies, better known as SPACs, via ETFs.
But their portfolios are quite different, and expensive.
Inception Expense Price Change
Fund / Ticker Date Ratio AUM (mil) Since Inception
Defiance Next Gen SPAC Derived / SPAK 09/30/2020 0.45% $106 31.1%
SPAC and New Issue / SPCX 12/15/2020 0.95 179 27.3
Morgan Creek Exos SPAC Originated / SPXZ 01/25/2021 1.00 40 8.0
Note: Data as of Feb. 12 Sources: Morningstar; FactSet