Investors looking for cosmic themes might find space ETFs fall short
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Investors wishing to gain exposure to the business possibilities of outer space with exchange-traded funds will soon be offered their first listed opportunity in Europe when HANetf’s all-new vehicle launches in early June.
But although entrepreneurs like Elon Musk, Jeff Bezos, and Richard Branson are spending billions of dollars on competing developments that could potentially help humans travel beyond the moon, industry watchers warn that space ETFs do not ‘often have only weak ties to the general theme.
âThe space is defined very loosely when you take a close look at the holdings of these ETFs. Only a few of the constituent companies are tied exclusively to the space economy and some of the holdings are small illiquid stocks, âsaid Peter Sleep, senior portfolio manager at 7IM, a wealth manager of existing products in the market.
The best known is ARKX, Ark Invest’s actively managed space exploration and innovation ETF, which has built assets worth around $ 645 million since it began trading at the end of March.
Ark Invest founder Cathie Wood described ARKX as a way to invest in a range of technologies, including rockets, mobile connectivity, 3D printing, robotics, sensors and artificial intelligence.
But the ETF made headlines when it launched when it emerged that one of its main holdings was Ark’s 3D Printing ETF, which still has a weighting of over 6%, a cross-stance that some analysts have flagged as a potential concern for investors.
This too keeps investments in companies that might not immediately conjure up a feeling of outer space, like the video streaming platform Netflix and farm machinery maker John Deere.
Emil Tarazi, founder and CEO of ETFLogic, a New York-based portfolio software provider, said that the returns of Ark’s range of ETFs were highly correlated and that investors were âactuallyâ buying a combination of ‘momentum or growth actions that were available at lower cost with other products.
âMany thematic ETFs are US-centric and have very concentrated baskets, containing only 20 or 30 names. Investors are therefore buying narrow baskets with low diversification and relatively high expense ratios, âTarazi said.
ARKX was launched with a 1.9% stake in at least one company with a clear connection to commercial space exploits – Virgin Galactic – but divested its stake earlier this month in the pioneering human spaceflight company.
Ark did not respond to a request for comment.
HANetf’s Procure Space Ucits ETF is expected to be listed on the London Stock Exchange in early June.
âSatellite systems and technologies are a major growth market. Space tourism is also getting closer to reality, âsaid Hector McNeil, co-founder and CEO of HANetf, a specialist in white label ETFs.
HANetf has partnered with Procure, a Pennsylvania-based boutique to create the ETF, known as YODA after a popular Star Wars character, which will invest in around 30 satellite operators and revenue-generating technology companies. space companies of at least $ 500 million or who earn at least one-fifth of their income from space activities. Yoda will have a total expense ratio of 75 basis points.
Procure already offers a US-listed twin space ETF known as UFO, which has built assets of $ 127.5 million since its launch in April 2020.
âThe space economy is part of people’s daily lives, whether it be satellites to help meet increasing demands for data transfer or to support GPS systems and weather forecasts. It’s not just about space exploration, âsaid Robert Tull, co-founder and president of Procure.
YODA will join a selected group. Ben Johnson, director of passive fund research at Morningstar, the data provider, said the three existing listed US space ETFs (ARKX, UFO and ROKT) have very different portfolios with an overlap of only 20% on average. between their holdings.
âThe only thing that limits the development of new thematic funds is the imagination of asset managers. They can come to very different conclusions when they come up with their definitions of these themes and choose actions that match them, Johnson said.
ROKTState Street’s SPDR S&P Kensho Final Frontiers ETF was launched in October 2018, but only built assets worth $ 25 million. It has generated a return of 14.4% since he started trading.
Johnson said hot new themes, such as space, were typically considered by investors long before a new ETF was launched.
âThis will often tilt the risks that investors in these funds face disproportionately downward,â Johnson said.
He cautioned that there was “no guarantee” that a thematic ETF would survive the long term and outperform a broad market index fund.
âIndeed, in practice most have failed,â he said.