ETF TV News #61 Paul Dellaquila, President, Defiance ETFs joins ETF TV to discuss SPACs

Dan Barnes Welcome to ETF TV News – your updates on the latest issued, exchange-traded products and funds. I’m Dan Barnes. Joining me today is Paul Dellaquila, president at Defiance ETFs. It is the launch of the first SPAC ETF. And of course, also with me is Deborah Fuhr. Deborah, welcome back to the show.

Deborah Fuhr Thank you.

Dan Barnes Deborah, could you give us an update quickly on the numbers of new ETFs that we’ve seen over the previous week?

Deborah Fuhr So during the week of February 8th, we saw 28 new listings, 11 new cross listings. I think interestingly, also, if you look at the global ETF industry, we saw that at the end of January, we broke through 8.6 trillion US dollars, had a record 83 billion of net inflows. US is at 5.5 trillion, a new record with 57 billion of net inflows. Europe is at 1.3, a new record with 20 billion, another record of net inflows. In terms of new listings, last week we saw 15 new issuers bring products to market on 11 exchanges. One was a digital product, 24 equity, three fixed income, seven were ETNs, 21 were ETFs. And we can dive into more details a little bit later.

Dan Barnes That’s great Debbie, thanks very much. Over the past couple of years, we’ve seen 377 SPACs come to market. However, there have only been three ETFs which invest in SPACs. Paul, first of all, I’d like to welcome you to the show.

Paul Dellaquila Thank you very much for having me. It’s a pleasure to be here, both Dan and Deborah.

Dan Barnes And then, could you unpack for us, as background, what exactly is a SPAC?

Paul Dellaquila A SPAC is what’s called a ‘Special Purpose Acquisition Company’. It’s also referred to as a blank check company oftentimes. And its practical business  is it trades in an exchange, but its sole purpose is to find a private entity to bring to the public markets.

Deborah Fuhr You’ve launched one of three SPAC ETFs, you were the first to come to market. Can you talk a little bit about your ETF and how it differs from the other two that have recently launched?

Paul Dellaquila So our ETF is the only rules-based index SPACETF in the marketplace. The other two ETFs that are out are actually focused on active management. Our ETF is providing investors with two streams of SPACs exposure. It is actually the companies that have already merged with a SPAC, so we think about DraftKings, Clarivate, and Virgin Galactic. We are also providing exposure to the pre-merger SPACs. So in other words, the SPACs that are trading on an exchange, they’re yet to find a target. So we’re actually providing exposure to both. One of the active ETFs is only providing exposure to the actual pre-merger SPACs that have yet to find a target, and the other is doing a little bit of a hybrid approach similar to ours, but more of an equal weight approach. We feel like we have a very good, robust exposure to provide investors who want to play the SPAC market place.

Deborah Fuhr I know back in 2010 the statistics were about 60% of SPACs actually failed. So SPACs were seen as pretty risky. Last year we saw issuance of about 81 billion. Year to date, we’ve seen about 24 billion come to market. How should investors think about SPACs today compared to 2010?

Paul Dellaquila An investor has to understand what a SPAC can play in this context of the portfolio. We make this more as a core complement type of position. The financial advisors that we’re speaking with are definitely looking at this as more of an alternative, private, equity-like type of strategy, where it more or less democratizes private equity for certain retail investors who might not have access to it. So you have to understand all of that is the backdrop. But if you look, since 2017, the performance of those post-merger companies and the SPACs themselves has increased. There are higher quality managers who are actually sponsoring SPACs, so Goldman Sachs, TPG, Apollo Group are all involved, but also Michael Klein, Bill Ackman is the four billion dollar gorilla in the space with the biggest war chest. But you’re also seeing a second part of that; higher quality companies are choosing to go public via SPAC, so DraftKings, which has a very solid business model here in the United States around fantasy sports and sports gambling. Virgin Galactic, Clarivate Data Analytics Company actually in Philadelphia here. So you’re seeing high quality companies choose to go public, which is helping the return profile of that space.

Deborah Fuhr Yeah, I think historically people thought that SPACs were companies that wouldn’t make IPO criteria. Why do you think companies might be going down the SPAC route as opposed to doing an IPO?

Paul Dellaquila I do think 2020 is an interesting enigma given the pandemic. So if you think about the traditional IPO process, it is much like a roadshow. You’re going around to investors trying to raise capital. In an environment where you have travel restrictions, that can be very daunting. It can also take up to 18 months for a company to go public. A SPAC does have a quicker path. Also, a lot of these SPAC sponsors have a discipline like energy or technology, so they’re bringing something to the table there to help in that transition. Also, I just think the world is full of choices. And for a lot of companies, the traditional map was the only way to go public. This is not going to completely eliminate that. Airbnb, a big one, just chose to go the traditional route, but it is going to be an alternative.

Deborah Fuhr Yeah, I would definitely agree. So far this has been a US phenomena. We are seeing, though, that sparks are crossing the pond to Europe. So I’m sure at some point we will see SPACs over here too. Thanks a lot for joining us, this has been very interesting.

Paul Dellaquila It’s my pleasure, Deborah and Dan. Thank you both for having me.

Dan Barnes Deborah, what can you tell us about the sort of themes we saw amongst the ETFs launched last week?

Deborah Fuhr We did have a Crypto product launched in Bermuda, which is kind of interesting because that’s the first ETF being launched there. We had 24 equity products, three fixed income. Seven of the products were structured as ETNs, so exchange traded notes. 21 were ETFs, six were active and 13 were based on factors. So we haven’t seen a lot of factor products come to market until recently. I think if we dive into something that’s been an interesting trend over the past few years, we’ve seen that the banks in the US that used to list ETN, so Morgan Stanley, Citi and Goldman Sachs, about three years ago said that they were no longer going to do creations on their ETNs. And so the firms that are doing ETNs today in the US are the foreign banks. So we have UBS doing Etracs, we have iPath from Barclays and we have Credit Suisse. And so Etracs launched seven products last week focused on factors. So we haven’t seen a lot of factors, because last year when we looked a lot of the smart beta, which is in essence factors, really didn’t gather assets. We saw that the inflows last year were half of what they were in prior years. So I think it’s interesting from a couple of perspectives; the structure and also the types of products coming to market. So it’ll be interesting to watch the adoption of these products and whether we see more ETNs coming to market in the future.

Dan Barnes Well definitely. There was, of course, amongs quantitative investors what was referred to as quantum mageddon when a lot of factor based investment strategy still calls out.

So I think at the end of twenty nineteen, if I remember rightly so, it’ll be interesting to see what sort of investor appetite there is for the ETF.

Yeah. And actually being in the ETF structure means you have counterparty risk, you have exposure to the issuer, which does limit how much investors can invest in many cases. It also changes the tax and regulatory outlook for these products. So I think there’s a number of things people need to understand when they look at investing in products structure as well as what’s inside of it and what’s intending to do.

That’s great, Deborah Thank you so much. Thank you.

Published on February 17, 2021