Remember SPACs, or special purpose acquisition companies? The billion-dollar flood into these complex investment tools has subsided, but some investors still found a surprising way for SPAC ETFs to pay off.
Depending on which SPAC ETF you invested in, you're either thanking your lucky stars you own it, or ruing the day you bought it. Just look at the performance spread of some of the top SPAC ETFs. On one hand the Robinson Alternative Yield Pre-Merger SPAC ETF is actually up 0.4% this year. Meanwhile, the Defiance Next Gen SPAC Derived ETF is down a crushing 35.5%.
What's the difference in a nutshell? The question is whether the ETFs own individual SPACs that actually used investors' money to do a deal, or did they just sit on the cash? And in this case, doing nothing was much better.
"SPAC-related ETFs tend to focus on less profitable, higher risk with potential for longer term reward companies that have been out of favor in the current environment," said Todd Rosenbluth, head of research at VettaFi.
What's A SPAC ETF?
How does this work?
SPACs, commonly known as blank check companies, are a backdoor way to take a company public. The SPAC raises money from investors by listing its shares on an exchange. The SPAC then pays its investors a small amount of interest while their sponsors look for another company to buy. If the SPAC finds a target, usually within 24 months, its uses investors' cash its holding to buy the company and essentially take it public.
Going public using SPACs was popular in 2020 when stock markets were exuberant. More than $260 billion poured into SPACs from the start of 2020 until first quarter this year, says The Economist. Several SPAC ETFs formed to invest in individual SPACs. But that rush is over. Just 53 SPAC IPOs launched in the first quarter, says White & Case. That's less than half the 163 in the fourth quarter of 2021. SPACs only account for 5% of the companies going public so far this year, down from 63% in 2021.
Additional, many individual SPACs aren't finding deals. The dollar value of SPAC mergers dropped nearly $150 billion from the boom in the first quarter of 2021. Only 16 deals got done. Of the nearly 300 SPACS that raised money in the first quarter of 2021, nearly 200 still haven't done a deal.
Ironically, those 200 are the ones doing best for SPAC ETFs.
Do-Nothing SPACs Do Best
To understand why do-nothing SPACs are best this year, consider what they don't own.
You won't find any of the crashed SPAC-fueled deals like electric-car maker Lucid, which has seen its shares lose more than half their value this year. Nor will you find online gambling firm DraftKings, which also lost more than half its value this year.
Instead, its top holding is Fintech Evolution Acquisition Group. This is a pool of money that raised $240 million following a 2021 offering. The cash is sitting in a money market fund and earns interest for investors.
As a result? The value of the SPAC is actually up nearly 1% this year. Nope, that's far from a stellar return. But it sure beats the 20% drop in the S&P 500 this year. And it's miles ahead of SPAC ETFs that invested in individual SPACs that bought other companies.
SPACs Gone Bad
If ETFs that own SPACs that did nothing are the best, which are the worst? That would be those owning companies that used the cash investors gave to them.
The Defiance Next Gen SPAC Derived ETF is chock full of hundreds of funds. Unfortunately, many of them used their cash to merge with companies that crashed in value. The ETF's top holding is Lucid, at 3.3% of the portfolio. It also has a 1.5% weighting in DraftKings. Some of its holdings, though, like Pershing Square Tontine are still looking for deals. That stock is up 1.1% this year.
With SPACs this year, less is more.
Ranking The SPAC ETFs
| ETF | Symbol | YTD % ch. | Assets ($ millions) |
|---|---|---|---|
| Defiance Next Gen SPAC Derived ETF | -35.5% | $14 | |
| Exos SPAC Originated ETF | -33.9% | 6.1 | |
| The SPAC and NEW Issue ETF | -2.6% | 37.6 | |
| Robinson Alternative Yield Pre-Merger SPAC ETF | 0.4% | 23 |
