28th Jan 2021
That most fashionable, but potentially volatile, of sectors, Special Purpose Acquisition Companies (SPACs) has seen enormous growth so far this year, with 133 SPACs, which are also known as blank cheque companies, floated in the US, raising USD51.1 billion, nearly four times last year’s volume, and a further 67 waiting to launch, according to Spac Research. Some 80 SPACs raised more than USD32 billion in Q3 2020.
Where there’s a new theme, Defiance ETFs are in, wedded as they are to being first movers in new markets. The firm has launched the SPAC ETF (SPAK), to run alongside their FIVG (5G ETF) and IBBJ (Junior Biotech ETF).
The new ETF brings diversity to a newly crowded sector, with an index built with Indxx. The ETF currently has 36 holdings, rebalanced on a quarterly basis. An 80 per cent weighting is applied to IPO companies derived from SPACs and 20 per cent is allocated to common stock of newly listed SPACs, ex-warrants. Newly listed companies derived from SPACs will be screened monthly and SPACs quarterly.
Paul Dellaquila, President of Defiance ETFs says: “We are always looking for ways to be a first mover and innovate and over the last year plus you have seen the maturation of the Spac market.”
SPACs are companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses. This year has proved a challenge to the traditional IPO route, which relies heavily on road shows and meetings.
“The Covid era challenge has led to SPACs being an alternative to IPOs and it is quicker to market. A current private company can partner up, discuss terms and get a deal done in a fast time,” Dellaquila says.
“Investor interest and maturation of the market has allowed us to build SPAK and we believe it’s a space that will continue to grow and offer an alternative to the IPO market.”
Within the current portfolio are DraftKings, the largest provider of sports betting in the US, or Clarivate, an analytics company.
“With more money becoming available you can get higher quality companies and more prevalent names,” Dellaquila says. “Issuance wise you are finding some bigger players and with the ETF we are trying to provide exposure to the biggest and most liquid SPACs.”
The initial response to the ETF launch was assets of just over USD20 million, coming in from retail investors and financial advisers.
“The thinking is to focus on the pre-IPO SPACs that are going to pop in price,” Dellaquila says. “Some do a great job and others don’t so you need diversity across the space. This offers investors diversity rather than trying to find them themselves.”