First blank-check ETF debuts

The first exchange-traded fund to track blankcheck companies will make its trading debut Thursday, giving investors a chance to make a concerted bet on one of the hottest areas of the stock market.

The Defiance NextGen SPAC IPO ETF begins trading on the New York Stock Exchange under the ticker SPAK, according to a press release. The new fund will primarily track shares of companies that listed on exchanges by merging with special purpose acquisition companies, rather than those that held a traditional initial public offering. It will also track SPACs that have not yet executed an acquisition.

Concerns remain over whether the SPAC market is large enough to support an ETF portfolio, even after a record-breaking year that has seen more than $41 billion raised so far. SPAK seeks to counter that worry by weighting its holdings according to market value. That will give extra exposure to shares of SPACs that have surged after they bought a private company, effectively taking it public. More than 80% of the ETFs holdings will be occupied by the likes of DraftKings Inc. and Virgin Galactic Holdings Inc., while only 20% will be weighted toward newly created shells that have yet to make a purchase and have no operations.

“It includes the entire ecosystem without picking winners and losers,” Defiance ETFs Chief Executive Matthew Bielski said in an interview. “The biggest companies have the biggest exposure, so there’s not a liquidity issue.”

SPAK is passively managed and charges a fee of 45 basis points.

SPACs have exploded in popularity this year as a way for purchasers to avoid the costly and time-consuming IPO process that for a time grew more difficult thanks to unprecedented volatility. Instead, the company sells to the public shares of a company that has no operations. Its owners promise to use the money within two years to buy a private company.

Recent successes have fueled the frenzy. Virgin Galactic surged after it was bought. DraftKings jumped following its transition to the public market. The wave gathered more momentum on Thursday, with storied men’s magazine publisher Playboy Enterprises Inc. announcing plans to return to the public markets through a SPAC.

While SPAK will likely attract inflows, the fund’s 20% weighting to pre-acquisition SPACs will limit its potential for “outsized returns,” according to a Bloomberg Intelligence report — a necessary concession in exchange for ease of trading.

“Pre-acquisition SPACs have the most potential to surge on news of a deal, but most are tiny and thus unable to fill out an entire ETF,” BI analysts Eric Balchunas and Morgan Barna wrote in a report Thursday. “The sector’s liquidity isn’t sufficient enough to support a pure-play SPAC ETF.”

[More: Fidelity Magellan launch could boost appeal of semitransparent ETFs]

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