To many investors, the investment world appears to offer unlimited options, with the growing segment of space companies presenting opportunities that feel as expansive as the universe itself.
“It’s really easy for investors to picture how much potential this sector already offers, but even more in the future,” says Spencer Barnes, portfolio manager and associate vice-president of mutual funds and ETF strategy for Raymond James.
Indeed, this theme has hit a fever pitch in 2020-21, with many investors’ interests piqued by tech barons Jeff Bezos’s Blue Origin and Elon Musk’s SpaceX as they push toward commercializing space.
While both are private firms, not yet listed on public markets, investor appetite for all things space is higher than it’s ever been, and capital has been pouring into the recent launches of three space exchange-traded funds, or ETFs.
Topping the list is ARK’s Space Explorations and Innovation ETF (ARKX), which garnered about $600 million in assets under management within weeks of its launch.
While investors can choose companies with revenues exposed to the burgeoning space-based economy, ranging from satellites to consumer travel and even the mining of other planets, picking winners of distant future profits is challenging to say the least, says Daniel Straus, director of ETFs and financial products research at National Bank of Canada Financial Markets.
ETFs offer a less risky strategy, with low-cost exposure to dozens of companies.
“These are efficient, very concentrated ways to get exposure to what could potentially be a very high-growth industry,” he adds.
Until recently, investors had only two choices, both listed on U.S. stock markets: Procure Space ETF (UFO) and SPDR’s S&P Kensho Final Frontiers ETF (ROKT).
Yet the entrance of ARKX has sparked growing interest, in part because it is run by celebrity portfolio manager Cathie Wood. She leads ARK Invest, the fund company renowned for innovative and highly popular thematic funds, including the ARK Fintech Innovation ETF (ARKF).
That said, the two other recent launches are notable for Canadian investors because they are both listed on the domestic exchanges. One is Emerge’s ARK Space Exploration ETF (EAXP), which has essentially the same portfolio as ARKX.
The other is Harvest’s Space Innovation Index ETF (ORBT). While ARKX and EAXP are actively managed – their holdings picked by Wood and her management team – ORBT is a hybrid between passive and active funds.
“Harvest uses natural language processing to read through company documents and related material … to see how much of the business is centred around space exploration and development,” Barnes says.
Regardless of the selection process, all space ETFs have similar holdings, and investors may be surprised by what these funds actually contain.
“You will find companies that might not intuitively make sense at first glance,” Barnes says, adding that first and foremost the ETFs do not include SpaceX and Blue Origin. Instead, ARKX’s top holdings include Amazon Inc. (AMZN), Boeing Company (BA) and NVIDIA Corp. (NVDA).
“These are companies leveraging the technology of space exploration, giving them a competitive edge.”
Barnes points to NVIDIA – a computer microchip manufacturer – which is not a space company. Yet its technology is “quite likely” an integral component used in rockets and satellites, he says.
Given that space ETFs hold many companies with limited exposure to the nascent space economy, a good argument can be made for investing in non-space ETFs with exposure to the aerospace and technology sectors, which typically hold the same firms, Straus says.
“In fact, before UFO launched, the only way to play a space theme was through an aerospace ETF,” he says.
Space ETFs often include defence contractors such as Raytheon Technologies Corporation (RTX).
“It’s really buyer beware … because these portfolios are not likely what you may think,” Barnes adds.
More than anything, the space sector is both new and frothy with investor interest. Consequently, despite its tremendous promise, it is unlikely to send your investment dollars straight to the moon anytime soon.
“New and exciting segments like space are subject to a lot of hype, and they are likely to have a lot of boom-and-bust cycles before they mature into their potential profitability,” Straus explains.
That’s not to say the underlying companies are not profitable, as many are involved in technologies like satellites and GPS, now integral to many sectors, notably telecommunications and agriculture, he adds.
“But space comes with many risks, including speculative bubbles, so some of the price action we are seeing today is likely a bit premature.”