Category: Defiance ETFs SPAK

SPACs: There's Now An ETF For That

Summary

  • SPAK just started trading yesterday, so I examined the fund.
  • The majority of the fund owns stocks that have already completed their merger with a SPAC.
  • The fund does not have many of the newest or largest SPACs yet to announce a merger.

With all the attention SPACs have received, it was only a matter of time before an ETF covering SPACs came to market. Yesterday, the Defiance NextGen SPAC IPO ETF (SPAK) launched and I will be going through an overview of the fund in this article. I will be covering key details, index methodology/weighting, and examining the holdings.

SPAK Key Details

-Expense ratio: 0.45%

-Number of holdings: 35

-Rebalance frequency: Quarterly

SPAK Index and Methodology

Looking into the index and methodology, I found some interesting information on which SPACs are included in the fund. SPAK focuses the majority of its holdings on SPACs that have already completed a merger with a target company. As is noted below 80% of the fund is allocated towards that area and only 20% are allocated to SPACs that have not completed a merger. Within that 20%, the majority of that weight is allocated to SPACs that have already announced a merger, but have not been finalized yet. For details on that, I will refer you to the holdings section below.

The Indxx SPAC & NextGen IPO Index is a passive rules-based index that tracks the performance of the common stock of newly listed Special Purpose Acquisition Companies (“SPACs”), ex-warrants, and initial public offerings (“IPOs”) derived from Acquisition Companies over the preceding 36 months. - SPAK Index Description

Index inclusion criteria

-Market Capitalization: Over $250 million

-IPOs from SPACS: Daily turnover greater than or equal to $1 million

-SPACs: Traded on 90% of trading days in the last 3 months

-Float: Minimum free float equivalent to 10% of shares outstanding

Index weighting

-Weighting: Free float adjusted based on market capitalization

-SPACs already completed merger: Weight of 80%

-SPACs that have not completed merger: Weight of 20%

-Maximum Weight: Max weight for a holding is 12%

Addition of new holdings

As I noted above, the fund rebalances quarterly but new holdings can be added in between that time. As is noted below, SPACs that have already merged can be added as they happen monthly, while new SPACs that have listed are added quarterly.

 

A monthly review is conducted to effectively capture IPOs derived from SPACs. ~Index Methodology fact sheet

Existing constituents that are IPO companies derived from SPACs will remain part of the Index indefinitely unless they fail to meet the eligibility requirements. ~Index Methodology fact sheet

A quarterly review is conducted to effectively capture SPACs. ~Index Methodology fact sheet

SPAK Holdings

The table below shows the top ten holdings of SPAK and as you can see the majority of the top holdings are SPACs that have already completed a merger with a company. The top holding in the ETF is DraftKings (DKNG), which is not surprising. The full holdings list for SPAK can be found here.

 

 

SPAK Holdings

Since everyone is trying to find the next SPAC that will choose a company to merge with that will send the shares upward, I compiled the following table of just SPACs held by SPAK that have not yet announced a merger target. Surprisingly, I only counted six SPACs included in the fund that have not announced a merger target. Many of these SPACs are not on lists I see which are made up of the largest and most popular SPACs. These six SPACs account for only a 4.37% weighting in the fund. As is noted in the selection criteria above, SPACs need to have at least 90 days of trading, so the newest SPACs will not be added right away, which makes sense. However, I am still very surprised not to see a number of popular SPACs that are not included in the fund.

The full holdings of the fund point to SPAK being a viable ETF for investors looking for SPACs that have already completed their merger with a target. On the other side, it appears SPAK is not for investors who are looking to buy a basket of SPACs that have not announced a target.

CHURCHILL CAP CORP. II

(CCX)

APEX TECHNOLOGY ACQUISITION CO COM CL A

(APXT)

JUNIPER INDL HLDGS INC.

(JIH)

TUSCAN HLDGS CORP.

(OTC:THCB)

GX ACQUISITION CORP.

(NASDAQ:GXGX)

SILVER SPIKE ACQUISITION CORP CL A SHS

(NASDAQ:SSPK)

SPAK Holdings

Closing Thoughts

In closing, SPAK is an interesting ETF that investors are likely to turn to if they want exposure to SPACs that already completed a merger with some optionality on the remaining SPACs held that have yet to complete or announce a merger. For investors looking mainly for just SPACs that have not yet announced or announced but not completed a merger, this ETF is not likely the best option, since there is only a 20% allocation maximum to those categories. After doing my research for my recent article on five SPACs I found to be attractive, I lean more towards picking and choosing SPACs by management team, target industry, and whether the share price has not already had a large gain in anticipation of a deal.

Bonus! My SPAC ETF Idea

As noted in the last paragraph, I found picking and choosing individual SPACs to be a good strategy. However, if I were to pick a large basket, I actually have my own idea for a SPAC ETF that I am going to share. Once a SPAC starts trading, the ETF would buy the units and the fund would weight each holding against the size of the offering. The fund would also have a minimum offering size to be included in the fund. Once in the fund and a SPAC announces a merger, the company would stay in the fund for 1 year from the announcement date of the merger and then be removed.

For example, when the Virgin Galactic (SPCE) deal was announced on July 9th, 2019, that would have started the 1-year clock following the announcement and shares would have been sold on July 9th, 2020. One key for new ETFs is to be creative with a ticker and I think a good ticker for my ETF idea would be SPAI or SIPO (both short for SPAC IPO). If any ETF providers read about my idea, I would enjoy a chatting on this topic.

 

https://seekingalpha.com/amp/article/4377627-spacs-now-etf-for

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