- Defiance ETFs aims to capture the next generation of sector investments. Their 2018 quantum computing ETF has returned 68% since inception while their 2019 5G ETF has returned 37%.
- Now the firm has launched a new SPAC-focused ETF, SPAK. The president of Defiance ETFs, Paul Dellaquila, breaks down the investment strategy of the ETF for Insider.
- He also provides 4 reasons investors should get in on the SPAC boom now and the 3 advantages of a SPAC ETF compared to investing directly in a SPAC.
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Defiance ETFs, the firm behind the 5G ETF with almost $1 billion assets under management, is now capturing another major trend, special purpose acquisition companies.
Paul Dellaquila, who spent 18 years working on BlackRock’s iShares platform and is now president of Defiance ETFs, said the firm is capturing the next generation of sector investments.
“It’s really coming up with unique positions that are slightly differentiated from what’s out there, having a core philosophy that we stick to and ultimately making sure that our products are high quality,” Dellaquila said.
Having a first-mover advantage has contributed to the ETF’s impressive performance, Dellaquila said. The firm is hoping to use that first mover advantage once again with SPACs in their new ETF, SPAK, which since its inception has already returned 13.29% to investors.
SPACs, also known as blank-check companies, are formed by a group of investors with a strong background in a particular industry, or business sector.
Recent SPACs have been launched by former NBA basketball player, Shaquille O’Neal and famous investors, such as venture capitalist, Chamath Palihapitiya and activist investor Bill Ackman.
The blank-check company then raises funds from other investors and uses this cash to acquire an existing private company with the aim of taking it public. When the SPAC launches, the investment team either don’t have a specific target in mind, or they’re not ready to name it, in order to avoid paperwork and disclosures required by regulators.
Individuals are investing based on the reputation of the investment team and pay $10 a share,
The team then has two years to find and name a firm to merge with. At the point of merging, the investor can redeem the shares, or ask for their money back.
SPACs have been around for many years, but in 2020, the market boomed. More than 200 US blank check companies listed in 2020, according to data provider Refinitiv.
Dellaquila believes investors’ interest in SPACs comes down to the democratization of the IPO process. Investors have struggled to gain access to IPOs at the offering price, citing recent offerings, such as those of AirBnb and Snowflake, which both experienced the IPO-pop.
For example, Warren Buffett was able to pay $120 a share for cloud software firm Snowflake, while most investors on the secondary market had to pay around $280 by 1:00pm on the day of the IPO, Dellaquila said.
He believes SPACs now allow individual investors to play in the same space as institutional investors.
However, some are concerned about retail investors piling money into unknown investment targets. Legendary investor Jeremy Grantham recently said SPACs are part of a wider stock market bubble and said they were “encouraging the most obscene level of speculation.”
Dellaquila said he would have agreed with Grantham three years ago. But the playing field has now changed, as more accredited investors enter the market. He references Michael Klein of Churchill Capital, who has significant experience in deal-making and is now on his fifth SPAC.
TPG, Goldman Sachs and Apollo Group are entering the market and adding credibility, Dellaquila said.
Investment banks are recommending investors consider riskier assets for 2021, because of the low yields provided by bonds. This includes looking to the private markets, such as venture capital and private equity, which often can’t be accessed by retail investors.
The private equity universe was sort of cut off from the rest of the world, Dellaquila said. SPACs now offer a way to access it. And they also offer more transparency, he added.
“I’m actually in favour of more companies going public, because ultimately at that point, you’re responsible to shareholders, you actually are putting your skin on the line, if you will, and saying every quarter, we’re going to show transparency, and we’ve got to hit a goal, and we got to hit our objective, or shareholders are going to punish us for that,” Dellaquila said.
But some worry SPACs aren’t transparent enough as they provide less documentation to the Securities and Exchange Commission compared to traditional IPOs.
Not all traditional IPOs work out, Dellaquila said, citing SmileDirectClub as one example of a firm that hasn’t done well since its IPO. Investors aren’t guaranteed success with either SPACs, or traditional IPOs, and there will be winners and losers in both scenarios, he said.
This is why it’s an advantage to leverage an ETF focused on SPACs, as investors will be able to gain exposure across a range of SPACs instead of gambling on one or two.
The ETF’s investment strategy focuses on both pre and post-merger SPACs.
Eighty percent of the ETF is invested in post-merger SPACs, which are companies that merged with a SPAC and then went public, such as Virgin Galactic and DraftKings. The other 20% are pre-merger SPACs that are still to identify targets.
“We want to try to provide unique exposures that are differentiated that appeal to investors,” Dellaquila said.
Although SPACs are cheap to invest in, there is an element of risk and SPACs require significant due diligence. The ETF removes this burden and does the research for investors.
The team screen for liquidity and won’t own anything under $250 million and will hold stocks for a two year period. This means investors can gain exposure to post merger SPACs, but it also enables new blood to enter the ETF, Dellaquila said.
They also leverage a corporate governance screen through the firm’s index provider, INDXX. This helps investors avoid governance issues that have occurred with some SPACs, such as Nikola, a post-merger SPAC, which was accused of making fraudulent claims.
“It is what it is right now with [Nikola],” Dellaquila said. “Hopefully, that’ll clear up for them, because I believe in the concept of what they’re trying to deliver on. But they do have some hurdles to get through before our index provider will be comfortable.”
Dellaquila believes the involvement of major institutional investors signals the space is maturing. He highlights the following four SPACs as the most interesting in the ETF right now:
“It’s got the biggest war chest and clearly Bill Ackman and his team, they bring a lot of credibility to the space,” Dellaquila said.
The ETF holds two Churchill Capital SPACs, as well as Clarivate, the post-merger SPAC from the Churchill Capital group.
“So Michael Klein, his team and Churchill, they have a track record of being able to get deals done, they have a track record of adding value to the performance of what Clarivate has done since it merged,” Dellaquila said. “It’s done extremely well and their SPACs have done well.”
Dellaquila cites the recent SPAC from Apollo Group as one to watch, as more private equity firms enter the market.
A post-merger SPAC from Goldman Sachs that has performed well, Dellaquila said.
“Those SPACs [from more mature management teams], in our opinion, have a higher chance of success,” Dellaquila said. “They’re bringing experienced management teams to the table, bringing higher rates of capital that are attractive for private companies, and that to us say these probably have a higher rate of success.”
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