SPAC boom fades as ETFs tracking blank-check firms crater amid risk-off sentiment

NYSE trader
  • The boom in SPACs over the past year could be unwinding as ETFs that track the blank-check firms crater.
  • The Defiance Next Gen SPAC Derived ETF has dropped more than 20% over the past two weeks as risk-off sentiment persists.
  • More than 200 SPACs have raised $US70 ($90) billion so far in 2021, which nearly eclipses the amount SPACs raised in all of 2020. 
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SPACs, or blank-check firms, were all the rage in 2020 and the start of 2021, but that boom might be on the verge of unwinding as investors reconsider committing capital to the acquisition vehicle amid a rise in interest rates.

The Defiance Next Gen SPAC Derived ETF, which holds a basket of companies that either went public via a merger with a SPAC or are SPACs that have yet to announce an acquisition target, has cratered more than 20% over the past two weeks. Another such fund, the Morgan Creek – Exos SPAC Originated ETF is down by nearly as much in the same period. 

A sudden spike in interest rates over the past month has led to a risk-off environment in which investors are rotating out of high-growth tech stocks and into more cyclical stocks in the energy and financial sectors.

The wave of SPACs in recent months have focused on acquiring high-growth companies, mostly in the electric vehicle and battery technology space. High-profile SPACs that saw a surge in their share prices amid their debut include Nikola Corp., Fisker Inc., and more recently, Churchill Capital IV

To gauge how big of a boom the SPAC vehicle has seen over the past year, consider these stats from SPACInsider:

1. So far in 2021 there have been 216 SPACs that went public, raising gross proceeds of $US70 ($90) billion.

2. In all of 2020, there were 248 SPAC debuts that raised gross proceeds of $US83 ($107) billion.

3. From 2009 to 2019, there were 226 SPAC debuts that raised gross proceeds of just $US47 ($60) billion.

Besides the meteoric rise in SPACs over the past year, the froth in SPACs likely felt apparent to many investors once celebrities began launching their own blank-check companies, from former NFL player Colin Kaepernick to former baseball star Alex Rodriguez.

Despite the current decline in SPAC stocks, there is good reason for companies looking to go public to consider the vehicle. Relative to a traditional IPO, going public through a merger with a SPAC helps companies avoid a timely and costly road show that is often associated with IPOs.