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The new ETF will begin trading today on the New York Stock Exchange.
Angela Weiss/AFP/Getty Images
Investors have a new way to play the booming market for special purpose acquisition companies, or SPACs: the Defiance NextGen SPAC Derived exchange traded fund. It made its debut Thursday on the New York Stock Exchange under the ticker SPAK.
The ETF comes during a record year for SPACs: 116 initial public offerings have raised nearly $44 billion in proceeds—more than the past five years combined, according to data from SPAC Insider. Sometimes called “blank-check companies,” SPACs go public as cash shells, with sponsors later identifying an operating business to merge with. Shares in the SPAC convert to shares in the target company once they combine.
The SPAK ETF tracks the performance of the Indxx SPAC & NextGen IPO Index, but it isn’t a perfect representation of the overall SPAC market. In fact, it is more of an index of companies that went public via SPAC mergers. Those get an 80% weight in the index, while premerger SPACs make up the remainder, according to a regulatory filing on Wednesday.
Some of 2020’s best-performing stocks were the result of SPAC mergers. Those include Virgin Galactic (ticker: SPCE), DraftKings (DKNG), and—until recently— Nikola (NKLA). The first two are among the SPAK ETF’s top holdings, along with Clarivate (CCC), Vertiv Holdings (VRT), Vivint Smart Home (VVNT), and Open Lending (LPRO). Nikola was booted from the index on Wednesday.
The ETF’s tenth-largest position is an active SPAC: Churchill Capital III (CCXX). The $1.1 billion SPAC announced a deal in July to merge with MultiPlan, a provider of software and services to health insurers, at an enterprise value of $11 billion.
SPACs and companies must also have a market capitalization of at least $250 million to make the index. That excludes dozens of SPACs with smaller trusts. SPACs tend to do deals with a total value of several times their trust. The average SPAC IPO brought in $379 million in 2020, versus $231 million last year, according to SPAC Insider. Bill Ackman’s $4 billion Pershing Square Tontine Holdings (PSTH) brings up 2020’s average.
Some SPACs may also struggle to meet minimum liquidity thresholds of the ETF. Indxx plans to rebalance the index annually at the end of July, but can also add SPAC IPOs at the end of January, April, and October. Post SPAC merger companies can join on the last trading day of any month.
The low allocation to searching SPACs is likely because their stocks don’t tend to move much. In practice, SPACs rarely trade below their trust values. That’s because, at the time of a SPAC’s merger, shareholders have the option of redeeming their shares for a proportionate share of the cash in its trust—usually $10 plus whatever meager interest was earned since the SPAC’s initial public offering. Outside of periods of extreme market stress such as in March, it tends to be the floor for where SPAC shares trade.
Some SPACs from high-profile sponsors trade well above their trust values, however. That’s investors betting that the team will put together an attractive merger with an operating company worth more than the cash. In reality, some do and some don’t—the range of performances is wide, just as with traditional IPOs. Diversification through an ETF could mean extremes cancel each other out.
After SPACs announce their target and eventually close the deal, their historical performance is mixed. A Goldman Sachs study earlier this year found that SPACs tend to outperform the market over the month and quarter following their deal announcements, but that after the merger was completed, the new stocks tended to lag behind. That’s the group that gets an 80% weight in the SPAK ETF.
Some post-announcement, premerger SPACs that have meaningfully outperformed the market include Tortoise Acquisition (SHLL), which closes its deal with Hyliion on Thursday; DiamondPeak Holdings (DPHC) with Lordstown Motors; and Social 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 out for.
Canadian investors have had access to the Accelerate Arbitrage Fund (ARB.Canada) since April. It employs an actively managed SPAC merger arbitrage strategy. The ETF has returned about 14% since its debut, versus a 23% return for the S&P 500 in the same period.
The SPAK ETF has an expense ratio of 0.45%. Defiance’s other ETFs include the 5G-focused Defiance Next Gen Connectivity ETF (FIVG) and the Junior Biotech ETF (IBBJ). The company first filed for the SPAC ETF in late July.
“Picking 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 ETFs said in a statement. “SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investing, which until now was only available to large financial institutions.”
After pricing at $25 a share, the SPAK ETF opened at $25.74 on Thursday. It closed at $26.15, up 1.6% from the open and 4.3% above where it priced. The S&P 500 rose 0.5%.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com