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Friday, June 12 is shaping up to be one of the most memorable summertime Fridays in recent market history because that’s the day on which Elon Musk’s SpaceX is slated to go public. As of this writing, the company, which will list on the Nasdaq under the ticker “SPCX,” is expected to raise $75 billion at a valuation of $1.75 trillion, making it the largest initial public offering (IPO) in history.
Predictably, SpaceX enthusiasm is palpable, particularly among retail investors, some of whom are also clients of advisors. While the company is expected to set aside as much as 30% -- an unusually high percentage – of its IPO shares for retail market participants, some just couldn’t wait and have been flocking to various ETFs with exposure to the still privately held company.
One of the ETFs benefiting from investors’ burning desire for pre-IPO access to SpaceX is the ERShares Private-Public Crossover ETF (XOVR). XOVR, which came to market in November 2017 in as a different ETF, is experiencing a surge in popularity this year thanks in large part to a 13.48% weight to SpaceX. That exposure is obtained through a special purpose vehicle.
Data confirm XOVR is riding the wave of SpaceX enthusiasm. At the end of the first quarter, this was a $459.7 million ETF, according to issuer data. That tally is now $2.2 billion, according to ETF.com, confirming investors went hunting for “SpaceX ETFs” with many arriving at this ETF. However, advisors with clients engaged with this ETF would do well to give them a heads up about what to expect ahead of the SpaceX IPO.
XOVR Details Really Matter
ERShares points out that long-term XOVR investors “have already benefited from approximately $50 million in unrealized appreciation reflected in the Fund’s net asset value from SpaceX exposure.” That’s good news and with the stock expected to pop on its first trading day, it’s logical that some XOVR investors may want to engage in some profit-taking.
They won’t be barred from doing so, but ERShares notes it’s implementing “a shareholder protection plan ahead of the SpaceX IPO to help reduce potentially disruptive short-term trading activity.” According to a supplemental prospectus recently issued by the ETF sponsor, one of the tools it will use to mitigate first day SpaceX-induced volatility is a fixed transaction fee on redemption of shares in creation units.
The intent of that fee is to “offset the Fund’s trading costs, operational processing costs, brokerage commissions and other similar costs incurred in transferring certain of its portfolio holdings from its account to the account of the redeeming investor,” according to prospectus. But wait. There’s more for advisors to be aware of, including a possible redemption fee.
“In addition, a variable redemption/transaction fee, payable to the Fund, of up to a maximum of 2% of the value of the Creation Units subject to the transaction may also be imposed on redemptions,” notes ERShares in the regulatory document.
Authorized participants would be required to pick up the tab on the variable redemption fee and they’re not going to do so out of the kindness of their hearts, indicating some or all of those costs could ultimately be absorbed by investors.
A Protective Step
Let’s be honest. There’s a lot cash, much of it retail, parked in ETFs providing pre-IPO access to SpaceX. However, not all of those investors are pure of heart. Some – it’s their right to feel this way – simply want to enjoy a SpaceX run-up and hit the “sell” button.
The other side of that coin is that it can, albeit temporarily, disadvantage investors that see long-term merit in ETFs like XOVR and others with SpaceX stakes. No one is saying XOVR is perfect – the fund has endured its share of criticism – but the effort to shield long-term investors from a few days of SpaceX “mania” is admirable.
“The plan is designed to help protect long-term shareholders and retail investors from disruptive short-term trading activity that could create costs, liquidity pressure, or potential dilution of value created through the Fund’s SpaceX exposure,” adds ERShares.
Markets are the ultimate judges and investors will get a verdict on the efficacy of the ERShares on June 12 and during the following week.
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