One of the hottest trends currently on Wall Street, special purpose acquisition companies (SPACs) are dominating the initial public offering (IPO) market. In the third quarter alone, a record 83 SPACs raised $30.6 billion in their public listings, according to Renaissance Capital. As a whole, the SPAC market has raised over $41 billion so far this year.
Also known as black check companies, SPACs have existed on public markets since the 1980s, but have really become popular in 2020 amid high levels of liquidity and investment interest towards new growth opportunities. Moreover, the traditional IPO route requires a more extensive and costly process can seem unattractive to private companies that are looking to go public when market conditions are favorable, making the SPAC more desirable amid times of high volatility.
Unsurprisingly, the SPAC trend has led to the creation of an exchange-traded fund (ETF). The Defiance NextGen SPAC IPO ETF (NYSE: SPAK), debuted on the New York Stock Exchange on Thursday, offering a passively managed fund that will primarily track shares of companies that public list by merging with a SPAC.
The majority of SPAK's holdings will be held by companies like sports-betting platform DraftKings (NASDAQ: DKNG) and space travel company Virgin Galactic (NASDAQ: SPCE). The remaining minority holdings will be occupied by newly listed SPACs that have yet to acquire a private company and have no operations. The ETF currently has 36 holdings which are rebalanced on a quarterly basis, according to Defiance.
Yet, there are some concerns surrounding the SPAC market, and whether or not it is actually large enough to successfully support an ETF portfolio. SPAK's creators intend to ease these fears by weighting the fund's holdings according to market value.
Defiance ETF Chief Executive Officer Matthew Bielski told Bloomberg News in an interview that SPAK "includes the entire [SPAC market] ecosystem without picking winners and losers. The biggest companies have the biggest exposure, so there's not a liquidity issue."
SPAK is reasonably priced at 0.45% per year, and seems well timed for the current state of the IPO market. SPACs. are expected to remain popular at least in the near-term, with companies like Airbnb and Playboy Enterprises expected to publicly debut via SPAC this year.