Investors interested in a disruptive growth opportunity can consider a specialized ETF strategy that targets Special Purpose Acquisition Companies, or SPACs.
In the recent webcast, A New ETF Strategy for the SPAC Surge, Jennie Dong, Head of SPACs, NYSE, explained that SPACs raise capital via an IPO with the purpose of using proceeds to acquire an operating business.
SPACs go public through the typical IPO process. The sponsor is typically an institution or seasoned industry executive and generally focuses on an industry or geography. The full cash raised in IPO is placed in a trust account for the acquisition. If no acquisition takes place, the SPAC will liquidate and return funds to IPO investors.
“SPACs are quickly becoming a more accepted way to enter the public markets,” Dong said.
Matthew Tuttle, CEO and CIO, Tuttle Tactical Management, highlighted the blank-check boom in SPAC issuance. There were 248 launches in 2020, with gross proceeds of $83 billion. So far in 2021, there have been 154 launches, with gross proceeds of $46.7 billion. In comparison, there were only 59 launches in 2019, with gross proceeds of $13.6 billion.
Tuttle highlighted the number of benefits that come with SPAC launches. They produce Venture/Private equity-like investment with downside protection and come with liquidity though publicly traded securities. The downside protections include net proceeds from the IPO being placed in a bankruptcy-remote trust account providing dissenting investors with the right to redeem. There is an automatic liquidation if no acquisition within the predefined time frame. Additionally, investors gain equity exposure through cash investment, upside through shares price appreciation, alignment of interest through sponsor capital at risk, and access to incentivized best-in-class sponsors.
Tuttle also underscored the structural benefits of SPACs, notably private company ownership, limited downside exposure, and potential to preserve warrants.
Investors are awarded common, or Class A, shares, and warrants equivalent fractions of the Class A share, which convert to publicly traded common shares upon completion of the De-SPAC IPO. This allows investors to potentially capture exposure to previously inaccessible private companies.
SPAC buyers can typically redeem common shares for cash at the time of the SPAC IPO. Alternatively, the investor can seek to cash out their shares plus interest if they do not approve the De-SPAC transaction.
Class A shares and warrants equivalent to fractions of the Class A share trade separately in the secondary market. An investor would typically redeem their Class A shares if they do not approve a De-SPAC transaction, but still hold onto their warrants in case the transaction proves successful.
As a way to gain exposure to this strategy, investors can look to the recently launched SPAC and New Issue ETF (NYSE: SPCX), the first actively managed ETF that gives investors direct exposure to the disruptive SPACs theme.
“Research and trustworthy information on SPACs is sparse. Investors may be better served by a portfolio of SPACs in a wrapper that is liquid, tax-efficient, diverse, and low-cost,” Tuttle said.
SPCX’s actively managed structure can also benefit ETF investors.
“The SPAC market is rapidly evolving. Accordingly, the portfolio management style should allow for real-time reaction to events and enable a forward-looking approach to the calendar. Passive management does not allow for participation in SPAC IPOs at $10 per share,” Tuttle added.
Financial advisors who are interested in learning more about SPACs can watch the webcast here on demand.