Earlier this year, I speculated that advisors were likely to have more conversations with clients regarding special purpose acquisition companies (SPACs) and that those chats were likely to be initiated by clients.
Admittedly, it wasn't a particularly bold call given that blank-check mania reached epic heights in 2020 bringing an asset class that's nearly three decades old into the spotlight for the first time. Said another way, advisors that have been in business awhile probably went years, perhaps decades, without fielding questions about SPACs, but that likely changed last year or earlier this year.
Data support that assertion. In 2020, there were 248 blank-check initial public offerings that raised a combined $83.3 billion, according to SPAC Track. Not even halfway through 2021 and those figures are 349 and $107.67 billion, respectively.
Impressive as that last pair of numbers may be, all is not well in the SPAC market, but for clients sensing opportunity or fear of missing out, advisors have a new idea to discuss.
Better SPAC Idea
In further proof that there might well be an exchange traded fund for everything, the Robinson Alternative Yield Pre-Merger SPAC ETF (NYSEARCA:SPAX) debuted Wednesday.
As its name implies, SPAX focuses on blank-check companies that haven't announced deals. That's relevant for at least a couple of reasons. First, in a more sanguine SPAC environment, say last year, a blank-check stock trades sideways following its IPO and shoots higher following a deal-announcement. Of course, knowing which SPAC will find a merger partner and when is a difficult endeavor.
Second, SPAX isn't the first actively managed SPAC ETF. It isn't even the first SPAC ETF, but it's the only one in the field with the pre-deal emphasis. It remains to be seen how SPAX will treat companies after they “de-SPAC” and trade on a standalone basis, but as an active fund, it has the flexibility to dump those names and allocate back to pre-deal firms.
Assuming that happens, SPAX could be all the more appealing for clients wanting blank-check exposure because plenty of de-SPAC stocks are real clunkers and several have become favored targets of short sellers.
“Post-merger SPACs aren’t faring much better — the CNBC SPAC Post Deal Index, which is comprised of the largest SPACs that have come to market and announced a target, has fallen nearly 14%” through June 2, according to CNBC.
Maybe a Bond Alternative
Believe it or not, SPAX could be a fixed income alternative for risk-tolerant or young clients that don't want boring bond exposure.
“It has the credit and interest rate risk of a T-Bill portfolio; a base case return profile of the high yield bond market; and the upside potential of a strong equity market,” said James Robinson, CEO and CIO, Robinson Capital Management, in a statement.
Looked at differently, SPAX leverages active management to generate some income in asset class where dividends don't exist.
That happens by way of buying SPACs trading below $10 – the price at which most SPACs come to market and one that's supposed to be a floor of sorts. Owing to the aforementioned weakness in the blank-check market, nearly 300 SPACs (the total U.S. universe is 574) currently trade below $10.
Many are within a few pennies of $10, but buying a SPAC at $9.70 could mean a decent 3%-plus if it returns to $10. That's something SPAX could do, if the managers see fit, and that's a better yield than what clients get on 10-year Treasuries.
“Robinson attempts to purchase SPAC shares below trust value in order to generate a positive yield and higher overall returns. Given the attractive risk versus return characteristics, the manager believes SPAX is a compelling alternative for many traditional fixed income portfolios,” according to the issuer.
All and all, SPAX could be the way to go for SPAC-happy clients.
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