Another ETF investing in special purpose acquisition vehicles (SPACs) is due to shut this week in a further sign that investor interest in what was once the stock market’s hottest trend has well and truly subsided.
Investors’ love affair with SPACs came to a rapid end last year.
Often referred to as blank-cheque companies, SPACs are listed acquisition vehicles that are formed for the specific purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more private operating companies.
SPACs offer a means for risk-seeking investors to access untested businesses with high-growth potential.
Although SPACs have been around for decades, their popularity soared in 2020 as investment bankers, venture capitalists, and start-ups embraced the vehicle as a quicker, less burdened route to take companies public compared to an IPO.
Meanwhile, on the demand side, stimulus measures from the Federal Reserve combined with persistently low interest rates drove many investors to invest in riskier assets in the search for higher returns.
The SPAC craze ground to a halt last year, however, as spiraling inflation caused central banks to rapidly raise interest rates which led many investors to pull their money out of SPACs in order to de-risk their portfolios and seek returns elsewhere.
Additionally, around that time, cracks began to emerge in the SPAC market. Many SPAC deals in recent years were for businesses touting revolutionary, but largely untested, technology that has failed to deliver on previous expectations. Amid tighter credit conditions and a tougher macroeconomic backdrop, many such SPACs have been forced into bankruptcy or fire sales of their assets. Accordingly, regulators have begun to apply greater scrutiny to the SPAC market which has further served to decrease the appetite of investment banks to roll out new SPACs.
Amid this rapidly changing environment, two SPAC ETFs – the Defiance Next Gen SPAC Derived ETF (SPAK US) and Morgan Creek – Exos SPAC Originated ETF (SPXZ US) – both closed up in September 2022 after trading for less than two years.
Now, the latest SPAC ETF casualty is the Morgan Creek – Exos Active SPAC Arbitrage ETF (CSH US) which was brought to market just one year ago in February 2022. The ETF is due to cease operations, liquidate its assets, and distribute the proceeds to shareholders on 24 March. The fund’s rapid closure is potentially indicative of how the ETF’s sponsors, Morgan Creek Capital Management and EXOS Financial, do not expect conditions in the SPAC market to significantly improve anytime soon.
Despite the current strains, some analysts have stated that the SPAC market will settle at some point in the future as a smaller, more efficient segment, offering overall better quality for investors.