Heard of SPACs? Now You Can Trade Them in an ETF

The NYSE-traded Defiance NextGen SPAC Derived ETF offers a new way for investors to get in on the growing interest in special acquisition purpose companies.
Jennifer ChanOct 01,2020,15:08

The first of its kind, an ETF of bundled SPACs began trading this morning on the New York Stock Exchange. So far, so good; shares in the SPAC ETF are up 100% as of 10 a.m. EST.

What Is a SPAC Exactly?

A SPAC (Special Purpose Acquisition Company), also known as a “blank check” company, is similar, but not identical, to a reverse merger. Unlike reverse mergers, SPACs typically come with significant management groups and more financing. Reverse mergers, on the other hand, involve a private company buying a shell company that has no current operations but is publicly traded. While the shell becomes the surviving entity post-merger, the private company (and typically its management) become the operators.

SPACs, Pre- and Post-Merger

SPACs typically have two years after their IPO date to complete their target, which offers investors plenty of time to find and make the acquisition. SPACs are basically a way to go public without yet having a business, offering the principals behind the SPAC a way to generate more investment. Some SPACs are very clear about what kind of company they will merge with, and some SPACs offer only a vague description of what areas they plan to target for the eventual merger. That is why when you are betting on a SPAC, you are betting mostly on the management to find and complete a smart and successful merger.

SPACs have raised over $30 billion so far this year, up from $13 billion in all of 2019. Once a four-letter word, the SPAC is shedding its former negative connotation, thanks to the success of companies that have gone public via SPAC recently. Virgin Galactic’s merger with a SPAC led by the former Facebook executive Chamath Palihapitiya was one such deal. Also, Nikola and DraftKings, both of which took the SPAC route to the stock exchange. Last month, famed hedge fund manager Bill Ackman and Pershing raised $4 billion in the IPO of Square Tontine Holdings, Ltd., the largest SPAC IPO to date.

Will Defiance's SPAK SPAC Defy Expectations?

The first SPAC ETF began trading on the NYSE this morning under the ticker SPAK. Launched by Defiance, an ETF sponsor and registered investment advisor focused on thematic investing, SPAK tracks the performance of the Indxx SPAC & NextGen IPO Index. However, it is important to note that the Indxx is not comprised of every SPAC in the market.

So what does it track?

The Indxx tracks two types of SPACs; post-merger companies and pre-merger companies. In truth, ths ETF is weighted 80% with SPACs that have already completed a merger, with the remaining 20% comprised of premerger SPACs, according to a regulatory filing cited be Barron's on Wednesday.

Certain liquidity thresholds and a market capitalization of at least $250 million is required for SPACs and companies to make the index and therefore trade in the SPAK ETF.

Topics:SPACs, reverse mergers, IPOs, China. US,, stocks,