The SPAC, or special purpose acquisition company, market has experienced an incredible boom/bust cycle over the past year. SPACs are often called blank check companies because they are shell corporations that acquire other companies in order to bring them public. It's essentially a way of bringing a company public without going through the traditional IPO process.
A number of high profile companies have gone public via SPAC over the past year or two - DraftKings, Virgin Galactic and Nikola among them. They kind of went quiet for a while before getting thrust back in the spotlight with the announcement that the Trump Media and Technology Group was merging with a SPAC in order to go public itself.
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SPACs were all the rage in the 2nd half of 2020 and the 1st quarter of 2021, but the amount of cash raised via SPAC has crumbled during the past two quarters.
There are still firm believers in using SPACs as a way to bring companies public, but in terms of being a pure investment option, it's easy to see why interest has waned. SPACs, for the most part, haven't performed terribly well.
The Defiance Next Gen SPAC Derived ETF (SPAK) is the first SPAC-focused fund to hit the marketplace, but it was only launched on September 30th of last year, so there's not a great deal of data to work with. The performance story, however, is clear. The broader SPAC industry has badly underperformed the market.
SPAK is trailing the S&P 500 and Nasdaq 100 by nearly 50% since its inception. The trio of DraftKings, Nikola and Virgin Galactic all soared following their debuts, but have since come crashing back to earth. DraftKings is 50% off of its high. Virgin Galactic is down more than 70%. Nikola has fallen nearly 90%.
As a result, the SPAC ETF market has never really taken off. According to ETF Action, the six non-leveraged SPAC ETFs manage just $160 million combined. That creates some challenges in terms of investability - trading costs are still elevated - but it terms of the average investor gaining exposure to this space, ETFs remain the best option.
Here are four ETFs to consider for investment in 2022.
Defiance Next Gen SPAC Derived ETF (SPAK)
SPAK is the only ETF on this list that tracks an index instead of being actively-managed. SPAK itself is a combination of two different segments - 60% of assets going to SPAC-derived companies and 40% going to SPACs themselves. Qualification for the index isn't terribly complicated. It requires minimum trading volume and market cap levels and market cap weights holdings within the index.
The passively-managed nature of the fund could prove to be a negative. For broad exposure to SPACs and SPAC-derived companies, it works fine, but it only rebalances quarterly and reconstitutes itself annually. It could be a slow-turning boat if the sector moves quickly.
SPAK, however, is the cheapest and to both own and trade. At 0.45%, its expense ratio is nearly half that of its nearest competitor.
SPAC And New Issue ETF (SPCX)
SPCX is the 2nd SPAC ETF to come to market, the 1st actively managed fund of the group and currently the largest at around $75 million in assets. The fund's management team looks initially at companies that have gone public within the past two years and uses fundamental analysis to identify the most attractive opportunities within the space.
The advantage of SPCX is that it's actively-managed, something that's important in rapidly evolving sectors, such as blockchain, cannabis and crypto. In my opinion, that makes SPCX a potentially more attractive option despite the higher expense ratio. Given that it's a little larger than its peers, it has a better chance of minimizing trading costs, but all SPAC ETFs are still small enough that it's not really a factor yet.
CrossingBridge Pre-Merger SPAC ETF (SPC)
SPC is CrossingBridge's only ETF and it's also the newest among the SPAC ETFs having launched just two months ago. The "pre-merger" part of this fund is an important distinction because it will invest solely in SPACs and dump them once they merge with a company. According to the fund's website, "We aim to capture the fixed income nature of pre-merger SPACs, along with the equity upside that they present, but we have no interest in being an equity investor post-business combination, which presents a much different risk/return profile akin to a traditional equity investment."
One unique feature of SPC is its ability to invest outside the United States. Its prospectus mentions its ability to invest in Canada, the Cayman Islands, Bermuda and the Virgin Islands, so we're not really talking about broad global diversification here.
Morgan Creek - Exos SPAC Originated ETF (SPXZ)
SPXZ bears a resemblance to SPAK with a few important distinctions. SPXZ is actively-managed and maintains a combination of both pre-merger and post-merger companies. Whereas SPAK goes with a 40/60 split between the two groups, SPXZ generally targets the largest 50 pre- and post-combination SPACs as measured by market cap. It also equal-weights its holdings instead of cap-weighting.
SPXZ on its website emphasizes limiting exposure to companies incentivized to do a bad deal instead of no deal at all. It currently holds more than 100 different positions, so it's one of the better diversified SPAC ETFs out there.