One of the hottest themes on Wall Street is the proliferation of special purpose acquisition companies (SPACs) and where there’s a hot theme, an exchange traded fund usually isn’t far behind.
SPACs, also known as blank check companies, now have their own ETF thanks to the debut of the Defiance NextGen Derived SPAC ETF (SPAK) on Oct. 1. The new fund tracks the Indxx SPAC & NextGen IPO Index.
Part of the reason blank check companies are hot this year is that these vehicles give companies a different, non-traditional avenue for going public. The standard initial public offering (IPO) can be costly – both monetarily and time. The aspiring company has to pay attorneys and investment bankers and engage in road shows. Overall, it’s an expensive process that can six months to year, an unattractive proposition to companies and early investors looking to rapidly monetize investment or take advantage of favorable market conditions.
Thing is with SPACs is that these firms have to find acquisition targets to become attractive to investors. A special purpose vehicle will go public and use the raised proceeds to later finance a deal with a target with the plan being for the acquired company to go public, enriching its and the SPAC’s investors.
Trouble is if a SPAC doesn’t find a merger target, its shares flatline and become unappealing to investors. More importantly, blank check companies usually have roughly two years to do a deal or face the specter of liquidation.
SPAK Takes Some of the Edge Off
Despite those constraints, SPACs remain hot.
“In the third quarter, a record-breaking 83 SPACs raised $30.6 billion, the latest in a growing list of milestones for the increasingly popular IPO alternative,” according to Renaissance Capital. “The space is hotter than ever, but SPAC returns post-merger continue to undermine the growing hype.”
For its part, the new SPAK ETF reduces some of the risk associated with investing in this asset class. The fund accomplishes that objective by limiting exposure to blank check companies that are still in deal-hunting and tilting more toward companies that already went public via SPAC deals. Think DraftKings (DKNG), Virgin Galactic (SPCE) and Vivint Smarthome (VVNT).
In fact, DraftKings accounts for 20% of SPAK’s weight, meaning the new fund has by far the largest weight to that stock among all ETFs. With shares of the sportsbook operator up more than 67% over the past month, SPAK’s exposure to the hot stock could be a source of allure for investors.
Other points in SPAK’s favor include the obvious of first move advantage, lack of exposure to controversial post-SPAC companies, such as Nikola (NKLA) and allocations to special purpose vehicles with confirmed deals, such as Flying Eagle Acquisition Corp. (FEAC).
In theory, SPAK is a well-timed ETF that seizes upon a scintillating and it does what many ETFs: Eases the burden of stock picking while democratizing the investment process.
“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,” according to Defiance. “SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investing which is usually only available to large financial institutions.”
Source: Nasdaq – The SPAC Trend Now Has Its Own ETF