Finance

Spac ETF assets plummet as boom continues to lose steam

Assets in a clutch of recently-launched US exchange traded funds designed to tap into the Spacs market have nosedived over the past six months, in yet another indication that the once red-hot sector may be losing steam.

Financial News analysis of Morningstar data shows the handful of dedicated Spac ETFs on the market have recorded steep drops in assets since reaching a peak at the end of February.

One of the largest — the Spac and New Issue ETF launched in December 2020 by Tuttle Capital Management — had amassed $169.7m by February, coinciding with the height of the Spac market frenzy.

By the end of August, however, assets in the actively managed ETF, which invests in pre-deal Spacs, had fallen by more than 47% to $89.5m.

It is a similar story for the Defiance Next Generation Spac Derived ETF, rolled out in October 2020. The ETF has seen assets fall to $41.3m at the end of August — down 58% from a peak of $98.4m six months previously.

Likewise, the Morgan Creek Exos Spac Originated ETF, launched in January by Morgan Creek Capital Management and New York-based fintech company Exos Financial, has seen assets decrease by 54% since February to $20.3m at the end of August.

READ Spac boom continues to fizzle as volume drops 82%

The steep fall in ETF assets coincides with a drop in market-wide activity. Recent figures from S&P Global Market Intelligence show Spacs raised $16bn worldwide during the second quarter, down 82% from the previous three months.

Peter Sleep, a senior portfolio manager who invests in ETFs at Seven Investment Management, said he suspects the Spac boom is “well and truly over”.

“To me, these ETFs illustrate the risks of thematic ETFs,” said Sleep. “Naïve investors are sold a hot investment narrative that sounds great, has had great recent performance, but which they do not fully understand. What they end up with is an expensive and volatile ETF where the only winner is the ETF promoter who was able to get away with charging a high fee.”

Meanwhile Ben Johnson, global director of passive strategies at Morningstar, pointed to “pitiful” returns for both the Defiance and Morgan Creek ETFs.

“Poor performance has precipitated outflows from the funds. In tandem, these factors have left their assets well below the levels where they crested earlier this year,” said Johnson.

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Matthew Tuttle, chief executive and CIO of Tuttle Capital Management, said retail investors at the start of 2021 were looking at pre-merger Spacs like his firm’s Spac and New Issue ETF in the same way they considered meme stocks “because of the froth in the market”.

“Once individual investors realised that pre-merger Spacs were not meme stocks they took money out,” said Tuttle.

“We would say the boom is not over, it is just changing from an unhealthy froth to what the market is supposed to look like.”

Sylvia Jablonski, CIO at Defiance ETFs, said there has been a “pullback” in short term performance since the Spac market exploded earlier this year.

She said the Defiance ETF was targeting a longer term investment horizon — at least two to four years.

The Defiance ETF includes Spacs that need to make acquisitions within a two year period, as well as companies that have already gone public such as Virgin Galatic, Draft Kings and Open Door.

“ETFs are a great way to get longer term exposure, because you get diversified exposure to the most liquid and well capitalised names,” said Jablonski.

To contact the author of this story with feedback or news, email David Ricketts

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