Surge in SPACs inspires blank-check ETF

Exchange-traded fund investors may soon be able to participate in Wall Street’s latest craze: initial public offerings with a twist.

The Defiance NextGen SPAC IPO ETF will primarily track shares of companies that listed on exchanges by merging with special purpose acquisition companies, rather than those that held a traditional IPO, according to a filing Friday with the U.S. Securities and Exchange Commission. The ETF will be passively managed and trade under the ticker SPAK.

It’s the first plan submitted for such a fund as SPACs boom in popularity. More than $21 billion has been raised through 51 SPACs so far in 2020, a 145% surge from this time last year, according to Goldman Sachs Group Inc.

However, worries remain about whether the SPAC market is large and liquid enough to support an ETF portfolio. In addition, judging from the muted appetite for ETFs tracking newly public companies, it’s unclear that the current SPAC craze will generate sustained demand, said CFRA Research’s Todd Rosenbluth.

“Investors are big fans of investing in and talking about IPOs, but the IPO ETFs don’t get the same love,” said Rosenbluth, head of ETF and mutual fund research. “I also wonder if there are going to be enough SPAC IPOs to provide the necessary diversification for a new ETF. But asset managers are eager to skate to where the puck is possibly going, even if demand is not clear.”

The $89 million Renaissance IPO ETF (IPO) has seen just $31 million worth of inflows in 2020 despite trouncing the S&P 500 with a 46% year-to-date return.

At least 80% of SPAK’s assets will be invested in SPAC-derived IPO offerings from the prior 18 months, though that policy can change without shareholder approval with 60 days’ notice, according to the filing.

SPACs are “blank-check” companies that raise money with the intent of acquiring or merging with a private company with a two-year deadline before capital is returned to investors. Success from recent SPACs such as Virgin Galactic Holdings Inc. and DraftKings Inc. have stoked the frenzy -- Virgin has gained over 116% since listing last October, while DraftKings has soared nearly 82% since its April debut.

The suddenness of the SPAC boom means that not many ETFs hold them. A total of 46 ETFs own shares of Virgin Galatic, while 11 ETFs have DraftKings in their holdings. Just one fund -- the Fidelity NASDAQ Composite Index Tracking Stock ETF -- has exposure to high-flying Nikola, according to data compiled by Bloomberg.