Investors have a new way of playing the booming market for special purpose firms or SPACs:
Defiance NextGen SPAC derived
exchange traded fund. It debuted Thursday on the New York Stock Exchange under the ticker SPAK.
The ETF is coming off a record year for SPACs: 116 initial public offerings have raised nearly $ 44 billion in revenue – more than the last five years combined, according to SPAC Insider data. Sometimes called “blank check companies”, SPACs are published as cash shells, with sponsors later identifying an operating company to merge with. Shares in SPAC are converted into shares of the target company when combined.
The SPAK ETF tracks the performance of the Indxx SPAC & NextGen IPO Index, but it is not a perfect representation of the overall SPAC market. In fact, it is more of an index of companies published through SPAC mergers. These gain an 80% weight in the index, while the preceding SPACs make up the rest, according to a legislative application on Wednesday.
Some of 2020’s best performance was the result of SPAC mergers. These include
(DKNG) and – until recently –
(NKLA). The first two are among SPAK ETF’s best holdings along with
Living Smart Home
(LPRO). Nikola was started from the index on Wednesday.
The ETF’s tenth largest position is an active SPAC: Churchill Capital III (CCXX). SPAC of 1.1 billion. In July, it announced an agreement to merge with MultiPlan, a provider of software and services to health insurance companies, for a company value of DKK 11 billion. $.
SPACs and companies must also have a market value of at least $ 250 million to get the index. It excludes dozens of less trusted SPACs. SPACs tend to trade with an overall value that is several times their confidence. The average IPO from SPAC brought in $ 379 million in 2020 against $ 231 million last year, according to SPAC Insider. Bill Ackmans $ 4 billion
Pershing Square Tontine Holdings
(PSTH) brings up the 2020 average.
Some SPACs may also struggle to meet the ETF’s minimum liquidity thresholds. Indxx plans to rebalance the index annually in late July, but may also add SPAC IPOs in late January, April and October. Merger companies after SPAC can participate on the last trading day of any month.
The low allocation for searching in SPACs is probably because their stocks do not tend to move much. In practice, SPAC rarely trades below their confidence values. This is because at the time of a SPAC’s merger, shareholders have the option to redeem their shares for a proportionate share of the cash in its trust – usually $ 10 plus the modest interest earned since SPAC’s initial public offering. Outside periods of extreme market tension such as in March, it tends to be the floor for where SPAC shares trade.
However, some SPACs from high-profile sponsors trade far above their trust values. It is investors who are betting that the team will put together an attractive merger with an operating company that is worth more than the cash. In fact, some do and others do not – the range of performances is wide, as with traditional IPOs. Diversification through an ETF can mean that extremes cancel each other out.
After SPACs announce their goals and eventually close the deal, their historic performance is mixed. A Goldman Sachs study earlier this year showed that SPACs tended to outperform the market during the month and quarter following their trading announcements, but that after the merger was completed, new stocks tended to lag. afterwards. It is the group that gets a weight of 80% in SPAK ETF.
Some SPACs that have been previously published and which, after significant results, have surpassed the market include
(SHLL), which concludes its deal with Hyliion on Thursday;
(DPHC) with Lordstown Motors; and
Social Capital Hedosophia Holdings II
(IPOB) with Opendoor.
Barrons recently wrote a cover story on how to invest in SPACs and what factors to look out for.
Canadian investors have had access to
Accelerate Arbitrage Fund
(ARB.Canada) since April. It uses an actively managed SPAC merger arbitrage strategy. The ETF has returned approx. 14% since debut, against 23% return for
in the same period.
SPAK ETF has a cost ratio of 0.45%. Defiance’s other ETFs include the 5G focused ones
Defiance Next Gen Connectivity ETF
Junior Biotech ETF
(IBBJ). The company first filed for the SPAC ETF in late July.
“It can be very difficult to select the winners of individual SPACs, but the ETF structure gives investors access to the most liquid SPAC IPOs in a diversified basket,” Defiance ETFs said in a statement. “SPAK allows both financial advisors and retail investors to participate in an IPO investment style that until now was only available to large financial institutions.”
After pricing at $ 25 per. Stocks opened SPAK ETF at $ 25.74 on Thursday. It closed at $ 26.15, an increase of 1.6% from the open and 4.3% above where it priced. The S&P 500 increased by 0.5%.
Write to Nicholas Jasinski at email@example.com