These days, special purpose acquisition companies (SPACs) are all the rage. Thanks to the newly minted Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK), there’s now an exchange traded fund dedicated to blank-check firms and it could be the preferred way of accessing this asset class for many investors.
The new ETF tracks the Indxx SPAC & NextGen IPO Index, which tilts toward companies that are born out of SPACs, such as DraftKings (NASDAQ:DKNG). SPAK devotes about 80% of its weight to companies that were previously acquired by blank-check entities, using that avenue as a way of going public. The other 20% of the fund is devoted to pure SPACs, some of which already have deals in place. That allocation is important for multiple reasons.
“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,” according to Nasdaq.
Good Timing for SPAK
SPACs have grown in popularity as they increasingly attract high-worth, credible sponsors. As the quality of their founders and the success of their merger companies grow, so does their integrity in the wider investment community.
“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.”
Cementing the utility of SPAK is that the niche it addresses, though hot, is difficult to stock pick in, particularly before blank-check firms announce deals.
“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.”
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. SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investing. Those are meaningful traits because many post-merger companies struggle after SPAC deals, underscoring the potential benefits of eschewing selection of individual names and embracing SPAK’s basket approach.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.