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The spectacular explosion of Elon Musk’s SpaceX’s rocket minutes after launch in April was a reminder of the risks of space travel.JOE SKIPPER/Reuters

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As the tech bubble reached its peak in 2021, space-themed stocks were headline news as billionaire entrepreneurs Richard Branson and Jeff Bezos teased investor imaginations with their high-profile suborbital launches.

Three years later, most investors are probably sorry they did. Two Canadian exchange-traded funds (ETFs) launched within weeks of each other in April 2021 no longer trade. A third marketed by New York-based ARK Investment Management LLC is still standing but is down 34 per cent from its 2021 issue price.

The spectacular explosion of Elon Musk’s SpaceX’s rocket minutes after launch in April was a reminder of the risks of space travel. A week later, Japan’s ispace Inc. failed in its attempt to make the first private moon landing. Its lander accelerated unexpectedly and probably crashed.

The incidents brought home the technical challenges involved in the industry, the enormous risks and uncertainty involved, and the cost of failure. They follow the collapse of Richard Branson’s Virgin Orbital Holdings Inc., VORBQ in early April. Virgin Orbital planned smaller-scale rocket launches than SpaceX and filed for bankruptcy in April, two years after a US$3-billion initial public offering.

Mr. Branson’s Virgin Galactic Holdings Inc. SPCE-N is barely hanging on, with the shares having lost 94 per cent of their value since hitting a peak in mid-June 2021.

The collapse of the space ETFs highlights the perils of theme investing, which focuses on new ideas that might hold promise but are unproven. It often involves smaller, growth-oriented companies. Investors usually pile in when the theme receives the most media coverage, which is when prices are about to peak.

“Investing based on a theme or a sector makes you more likely to be caught in herd mentality or hype,” says Coreen Sol, senior portfolio manager with Solinvest Portfolio Management at CIBC Wood Gundy in Vancouver.

She says investment themes introduce bias by narrowing the available pool of stock choices. Stocks are screened less on merit and more because they fit the theme.

Ms. Sol is the author of Unbiased Investor: Reduce Financial Stress and Keep More of Your Money. The book offers strategies to help investors guard against common errors in judgment, one of which is behavioural bias.

Despite the spate of bad news, analysts say there is opportunity. While space travel has much appeal, but no real business, satellites, the rockets to launch them and command and control systems are a better bet.

Defence contractors have size and scale

Satellite demand is being driven in part by the replacement of military and civilian devices launched as far back as the 1960s. There are new demands for cybersecurity and military use, and in the civilian orbit, increasing demand for internet and 5G communications.

“Satellite costs have declined because of lower launch costs and reusable rockets,” says Rene Reyna, head of thematic and specialty product strategy at Atlanta-based Invesco Ltd. “That’s going to continue to evolve and [for investors] you end up in the aerospace and defence arena.”

Space-related contracts play to the core competencies of defence contractors that have the size and scale to build complicated and expensive systems. They also have well-developed relationships with governments and space agencies.

The U.S. Space Force, formed in 2019 as the space-focused arm of the U.S. Armed Forces, has been one catalyst. U.S. space agency – The National Aeronautics and Space Administration (NASA) – is subcontracting construction and subsystems. Civilian telecom companies are another source of business.

Northrop Grumman Corp. NOC-N is developing a space logistics business including a module that will stay in orbit and repair existing satellites. As more satellites are launched, repairing them is becoming a priority.

Raytheon Technologies Corp. RTX-N makes satellite command-and-control systems as well as spacecraft components. NASA’s Mars rover used Raytheon’s optical systems to view the landscape as it moves. A Raytheon assembly within the rover serves up the drill bits it uses to mine the surface.

Canada’s MDA Ltd. MDA-T is a leading supplier of satellite systems, robotics, and components for both the legacy and emerging space markets with its flagship Canadarm. RBC Capital Markets analyst Ken Herbert says in a research note he believes MDA is set to outperform this year.

How ETFs have performed

Mr. Reyna oversees Invesco Aerospace and Defence ETF PPA-A, which holds many of these companies. He says they offer stability and growth over time because “the U.S. defence budget is substantial and grows just about every year.”

In the meantime, pure-play space ETFs have crash landed. Emerge Canada Inc. launched a Canadian version of the ARK Space Exploration & Innovation ETF ARKX-A subadvised by Cathie Wood’s team.

In mid-April, Emerge’s funds were placed under a cease-trade order. At that point, the Emerge ARK Space Exploration ETF EAXP-NE was 33 per cent below its 2021 issue price, mirroring the parent fund’s decline.

Harvest Portfolios Group Inc. launched a space innovation fund in April 2021 – Harvest Space Innovation Index ETF – and closed it a year later. It had fallen 28 per cent in the 12 months after launch.

For investors, the new space race has truly been an expensive out-of-this-world experience.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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