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SPACs are often referred to as 'blank-cheque companies' that seek out seemingly promising, yet highly speculative private firms to merge with and take public.Maximusnd/iStockPhoto / Getty Images

If one investment theme illustrates the heights of the now-dead bull market, it’s exchange-traded funds focused on special purpose acquisition companies, or SPACs.

SPACs are often referred to as “blank-cheque companies” that seek out seemingly promising, yet highly speculative private firms to merge with and take public. Many SPAC ETFs launched during the pandemic, catering to retail investors hungry for risk, says Alan Fustey, Winnipeg portfolio manager with Adaptive ETF, a division of Bellwether Investment.

“I can’t think of a more speculative theme; giving money to an entity with no idea what kind of company it might purchase,” he says.

Among the more notable SPACs – which offer a lower cost, less scrutinized alternative to traditional initial public offerings (IPOs) – is Digital World Acquisition Corp. (DWAC-Q), which is planning to merge with Trump Media & Technology Group, the entity behind former U.S. President Donald Trump’s alternative to Twitter, Truth Social.

DWAC exemplifies the sector’s recent challenges, with Truth Social struggling to gain users and DWAC now under the scrutiny of the U.S. Securities Exchange Commission, among other SPACs.

“Not only are these speculative; there seems to have been a lot of nefarious trading going on among SPACs,” Mr. Fustey says.

The six SPAC ETFs below were previously featured in The Globe and Mail last July, highlighting their speculative potential for investors comfortable with risk. Consider this their nearly one-year post-mortem.


SPAC and New Issue ETF (SPCX-A)

Launched Dec. 15, 2020

One-year performance: down 5.2 per cent (All data from Morningstar as of June 16)

The ETF from Tuttle Capital Management is the largest by assets under management (AUM) among the six ETFs, at US$36-million. That’s down from US$108-million in assets last July, a drop reflecting how retail investors’ “focus is now on inflation and finding income” as opposed to speculating on SPACs, says Lois Gregson, senior ETF analyst in St. Louis with FactSet Research Systems Inc.

Still, SPCX, with a management expense ratio (MER) of 0.95 per cent, has performed better than most ETFs in the space due to holding only predeal SPACs.

“An advantage of investing in predeal SPACs is their inherent downside protection,” says Linda Ma, an ETF analyst with National Bank of Canada Financial Markets in Toronto.

Premerger SPACs list at $10 a share, and their price will rise and fall based on speculation over companies with which they intend to merge. Typically predeal SPACs trade within a few dollars of the list price and failing to find a deal within a two-year window, investors can generally redeem shares at $10 plus interest, Ms. Ma adds.

In contrast, post-merger SPACs “are at the mercy of the markets” where newly listed, often pre-revenue companies’ share prices are dragged down by growing regulatory scrutiny, tightening monetary policy and downgraded valuations, particularly for new technology stocks, which SPACs often merge with, she says.


Defiance Next Gen SPAC Derived ETF (SPAK-A)

Launched Sept. 30, 2020

One-year performance: down 48 per cent

SPAK has seen also its AUM drop over the past year, to about US$14-million from US$60-million last July. It differs from SPCX given that its portfolio is weighted to 60 per cent post-merger SPACs.

“On one side, you’re giving money to companies that don’t even know what they’re even going to invest in,” Mr. Fustey says about the ETF with a 0.45 per cent MER.

That’s the upside, if it can be called that, whereas the downside is SPAK’s larger allocation to post-merger companies, he adds. Included in its 417 holdings is Digital World.

The predeal SPAC is actually up about 194 per cent since its list in November, though down about 37 per cent in the last month. Still, its performance isn’t enough to offset losses among the ETF’s post-merger holdings, including fantasy pool provider DraftKings Inc. (DKNG-Q), down about 78 per cent over the last year.


Accelerate Arbitrage Fund (ARB-T)

Launched April 7, 2020

One-year performance: down 4.7 per cent

The only Canadian-listed SPAC ETF, ARB has not seen significant price deterioration given its focus on premerger SPACs. Its AUM has increased from about $39-million a year ago to about $41-million today.

Its increased investor interest likely stems from ARB investing in SPACs at or below net asset value (NAV), Ms. Ma says about the ETF with an MER of 1.38 per cent.

Then ARB “can either redeem [shares] at NAV at a later date, or if they are lucky, exit at a premium to NAV once the SPAC announces” a merger the market is excited about, she adds.

Similar to other ETFs in the space, ARB’s strategy may involve generating returns off warrants offered with each SPAC share. Warrants provide the option to buy post-merger companies’ shares at a set price, usually $11.50, which becomes profitable if the market share price goes higher.

Ms. Gregson notes that warrants are unlikely to have much value, given many post-deal companies’ share prices are trading well below $11.50.


Morgan Creek-Exos SPAC Originated ETF (SPXZ-A)

Launched Jan. 21, 2021

One-year performance: down 51.5 per cent

The Morgan Creek ETF has about US$6-million in assets, down from about US$25-million last July, partly a result of two-thirds of its portfolio involving post-deal SPAC companies “hit hardest in current market conditions,” Ms. Gregson says.

The ETF, with an MER of 1 per cent, includes holding such as Joby Aviation Inc. (JOBY-N), which has seen its shares fall by about 54 per cent over the past year. Another holding is Virgin Galactic Holdings Inc. (SPCE-N), which is down nearly 84 per cent over the past year.


De-SPAC ETF (DSPC-A)

Launched May 19, 2021

One-year performance: down 77.1 per cent

An entirely post-deal SPAC ETF, Tuttle’s DSPC has the worst one-year performance of the six. “It just shows how the whole theme has dried up,” Mr. Fustey says.

Even last July, the fund had only US$3.4-million AUM, so low it was at risk of closure, he adds. With less than US$1-million in assets today, closure risk is even higher for the equal-weighted ETF of 25 holdings and a 0.75 per cent MER.

In contrast, its mirror-image cousin Short De-SPAC ETF (SOGU-A), which shorts DSPC, has a one-year return of about 148 per cent and US$25-million AUM, charging a 0.95 per cent MER.

Yet SOGU also may face closure risk, Mr. Fustey says. “After all, it’s betting against the other side of the company’s investments.”