Ultimate Way to Approach SPACs is via Owning the SPAC ETFs

SPACs, also known as blank-check companies, are companies that never conducted or ceased to conduct commercial operations. The difference with numerous “shell” companies that flourished at the turn of the century is that, unlike them, SPACs are established solely to raise capital through an IPO for the express purpose of acquiring an existing operating company. Shell companies were the listed companies that no longer carried out business activities but maintained their listings (usually, in Nasdaq) and good standings with a HOPE to be approached by an external private company to go public without hassle.

So offering an alternative way for companies to go public, SPACs themselves are publicly traded investment vehicles whose purpose is to bring target companies public through the process of a merger. SPACs are incredibly complex vehicles and can differ widely in size, structure, and quality, among other things. Moreover, U.S. lawmakers are lately frowning at these entities. Thus, on May 24 House Democrats led by Maxine Waters, Chairwoman of the House Financial Services Committee, urged to impose stricter regulation on these entities during a financial services subcommittee hearing, arguing that “their explosion in popularity in recent years is due to the perception that going public via SPAC is less burdensome”.

However, ever since we haven't heard of any real developments in that matter. Having said that, while investors must be constantly aware of the underlying risks, they are free to diversify their portfolios for account of these interesting holdings.

On June 23 Robinson Capital Management, an independent investment advisor specializing in alternative fixed income strategies, launched the actively managed Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX, don’t confuse it with SPAXX, Fidelity® Government Money Market Fund). The Cowen SPAC ETF by Cowen Prime Advisors planned to offer a similar strategy and is also actively-managed. Three other SPAC ETFs are currently trading: the $71 million Defiance NextGen SPAC Derived ETF (SPAK), launched in October, followed by the $31 million Morgan Creek – Exos SPAC Originated ETF (SPXZ) and the $145 million SPAC and New Issue ETF (SPCX).

SPAX is a consideration for SPAC-interested investors for another reason: history shows that the pre-deal period is the optimal time to own a SPAC. Robinson Capital declares its focus on investing primarily in pre-merger SPACs because of the tendency for classic combination of low downside risks (ability to redeem shares at $10 each) with high upside potential, while it has zero correlation with traditional equity and fixed income markets.

That’s important because many SPAC stocks rally upon announcing a merger partner. Blank-check companies have two years to find a target or risk being liquidated, so there is a limited shelf life of these companies excluding a possibility of owning a loose cannon. Moreover, SPAX may be useful for investors because the current SPAC universe is too complex and multilayered to be able to separate the wheat from the chaff. There are around 600 U.S. domestic SPACs, 430 of which are actively searching for deals.

According to Charles Schwab research, “In general, SPACs have seen their strongest gains from the time of their IPO up until they find a merger target; conversely, their weakest performance has come after a successful merger,”. Researchers found that between 2010 and 2020, buying a SPAC at its IPO and selling it at the time of merger would have yielded a return of 9.3% annually. For SPACs held for a year after a merger, the annualized loss was 15%.