Defiance launches SPAC ETF targeting ‘blank cheque’ companies

Defiance has launched the first ETF to specifically target special purpose acquisition companies (SPACs), also known as ‘blank cheque/check’ companies or ‘cash shells’, and companies brought public via them.

The Defiance Next Gen SPAC Derived ETF (SPAK US) has listed on NYSE Arca and comes with an expense ratio of 0.45%. It has been seeded with $2.5 million.

SPACs are listed companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more private businesses within the next two years.

Such vehicles can facilitate a smoother route to public markets for private companies by avoiding many of the regulatory hurdles that accompany the traditional initial public offering process.

They can also provide investors with an avenue to access the growth and profit potential of new IPOs.

Notable SPAC successes in the past 12 months include DraftKings, a fantasy sports and betting operator brought to market via Diamond Eagle Acquisition Corp., which has soared 450%, and Virgin Galactic, a commercial spaceflight company brought to market via Social Capital Hedosophia Corp., which has gained 60%.

The size of the SPAC market has expanded significantly in 2020 with over $45 billion raised year-to-date (according to SPAC Insider), suggesting that some exciting deals are likely to be in the pipeline. One particularly high profile SPAC to debut this year is billionaire investor Bill Ackman’s NYSE-listed vehicle, Pershing Square Tontine Holdings. This SPAC raised some $4bn from investors and has purportedly made overtures to Airbnb.

But SPAC-derived companies can be highly volatile. This likely stems in part from the reduced regulatory scrutiny inherent in the SPAC structure. A case in point is Nikola, a maker of zero-emission trucks, whose share price soared 670% between the start of the year and mid-June but has since crashed 75% amid allegations of fraud. The company has still roughly doubled in value this year.

Methodology

The fund is linked to the Indxx SPAC & NextGen IPO Index which allocates 80% of its weight to US-listed common stock of companies that have come to market within the past 18 months by merging with a SPAC, i.e. SPAC-derived companies, with the remaining 20% dedicated to virgin SPACs that are still seeking acquisition opportunities.

Eligible securities must have a minimum market capitalization of $250m, a free float of at least 10%, and a three-month average daily turnover greater than or equal to $1m.

Within each category, constituents are weighted based on market capitalization, subject to a maximum weight of 12% for any individual constituent, and a minimum weight of 0.5%. Additionally, the aggregate weight for securities with a weight greater than 5% is limited to 45% at the time of each reconstitution and rebalance of the index.

The index is reconstituted and rebalanced annually in December, although newly eligible IPO companies may be added on a fast-entry basis within seven days following the company’s first trading date. There are currently 36 constituents, including names such as DraftKings, Clarivate, Vertiv Holdings, Vivint Smart Home Inc, and Open Lending Corp.

‘First of its kind’

In a statement, the issuer said: “The Defiance team is excited to bring to market the first SPAC ETF. Picking the winners of individual SPACs can be very difficult; however, the ETF structure allows investors to access the most liquid SPAC IPOs in a diversified basket. SPAK allows both financial advisors and retail investors to participate in an IPO private equity style of investing, which until now, was only available to large financial institutions.”

Rahul Sen Sharma, Managing Partner at Indxx, said, “2020 has been a record year for SPACs with more than $40 billion raised so far this year, significantly higher compared to 2019. Based on their ease of use and other positive attributes, more companies are expected to follow the SPAC route and the space should continue to evolve and grow in the coming years. The research and product development teams at Indxx put in tremendous effort to build this new and unique index, the first of its kind to offer focused exposure to SPACs and SPAC-derived IPOs. We are very excited to have licensed this index to Defiance ETFs.”

Added Vaibhav Agarwal, Chief Revenue Officer at Indxx, added, “SPAC IPOs are gaining in popularity as they offer a relatively hassle-free speedy alternative to the traditional tedious procedure. From an investor perspective, there are added benefits in terms of industry expertise on selection of targets and guaranteed return in case of failure to identify a target. We have developed a systematic approach to capture SPAC IPOs, and believe the index will help investors gain value from this growing space.”

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