The 2020 SPAC Attack Hits ETF Land

Episode Summary

Executive Summary: The episode examines the rise of SPACs and how they compare with IPO investing, using two ETF-focused guests to explain the mechanics, appeal, and risks. It argues SPACs expand access to earlier-stage growth companies and can create arbitrage opportunities, while IPO ETFs capture post-listing momentum. Both guests stress these are niche, active, and volatile strategies that may belong in a diversified alternatives sleeve, not as core holdings.

Main Topics: Why SPACs have surged (Priority: 5/5): SPACs are presented as a fast-growing vehicle for taking private companies public, especially earlier-stage businesses that may be pre-profit or pre-revenue and want growth capital. SPAC structure and economics (Priority: 5/5): The discussion breaks down SPAC IPO units, warrants, trust accounts, the 24-month deadline to find a deal, and sponsor promote incentives that can reach 20%. SPAC arbitrage as an ETF strategy (Priority: 5/5): Julian Klamachko explains his ETF approach: buy pre-deal SPACs at or below NAV, collect Treasury-like downside protection, and potentially profit from the post-announcement 'pop.' Post-SPAC performance and criticism (Priority: 4/5): The guests acknowledge that historical post-SPAC performance has been poor, but argue the market has changed with larger deals, stronger sponsors, and PIPE financing. IPO ETFs and aftermarket indexing (Priority: 4/5): Joseph Schuster describes IPO investing as an aftermarket strategy that targets the strongest recent listings, using quarterly rebalancing to keep winners and drop losers. Portfolio role of alternative ETFs (Priority: 3/5): Both guests suggest these products can fit as a small, diversified alternatives allocation because they may offer uncorrelated or differentiated exposure versus standard stock-and-bond portfolios.

Key Arguments: SPACs provide a route for earlier-stage private companies to access public markets and growth capital that traditional IPOs increasingly do not serve. The SPAC structure offers downside protection through trust assets and redemption rights, making pre-deal SPACs attractive for arbitrage. Sponsor promote incentives help explain why SPAC issuance accelerated, because founders can receive a large equity stake. Post-SPAC equities have historically underperformed, so the guests distinguish between pre-deal SPAC arbitrage and owning the merged company long term. IPO indexes aim to capture the small subset of new listings that become major winners while avoiding weaker names through systematic rebalancing. Both guests view these strategies as better suited to a diversified alternatives bucket than a single-stock, buy-and-hold approach.

Data Points: SPAC market size: north of $80 billion - Klamachko says the SPAC asset class has grown to this level, more than tripled since April. SPAC sponsor promote: as high as 20% - Founders may receive this equity stake in the pro forma entity after the business combination. Typical SPAC IPO raise: $200 million to $300 million - Amount raised in the initial SPAC IPO before a deal is announced. Traditional SPAC size historically: $50 million to $100 million - Klamachko contrasts earlier SPACs with newer larger offerings. Average current SPAC size: about $350 million - He says today’s average SPAC is significantly larger than in the past. PIPE financing: hundreds of millions of dollars - Additional private investment can be added at the business combination stage. SPAC time to complete deal: 24 months - If no acquisition is completed in that period, the SPAC liquidates and returns money to investors. SPAC unit split: after 52 days - Units split into common shares plus warrants after this period. Risk-free-like downside: Treasury-bill-like payoff - Pre-deal SPACs keep cash in trust and can be redeemed for cash plus accrued interest. SPAC ETF allocation: 20% pre-acquisition SPACs / 80% post-SPAC companies - The U.S. SPAC ETF SPAK is described as holding both pre-deal SPACs and merged companies like DraftKings. IPOX US composite universe: 900+ companies - Schuster describes the underlying universe for the IPO index strategy. IPO index holding window: day 6 through 4 years - His index buys companies after initial trading and exits automatically four years later. FPX outperformance: about 400 bps annually - Schuster claims the IPO ETF has outperformed the S&P by roughly 4 percentage points per year. FPX portfolio overlap with S&P 500: 4% - Used to illustrate how unique the ETF’s exposure is relative to major benchmarks. Alternative allocation suggestion: 20% alternatives sleeve - Klamachko describes a 'next 60-40' portfolio with a 20% allocation to alternative asset classes. Individual holding limit suggestion: no more than 10% - Schuster advises not putting more than 10% of a portfolio into a single holding. SPAC index performance in early 2020: negatively correlated with equities and bonds - Klamachko says the SPAC index had diversification benefits during the pandemic selloff. SPAC index drawdown: about 5%-6% peak-to-trough - He compares this with Treasury declines during the same period. Treasury drawdown referenced: about 8% - Used to argue SPAC index performance was stronger than Treasuries on a risk-adjusted basis.

Pivotal Quotes: "it acts as a structure in order to take a private company public" — Julian Klamachko: Explaining the basic purpose of SPACs and why they have emerged as a popular route to public markets. "Heads we win, tails we win big." — Julian Klamachko: Describing the SPAC arbitrage setup: downside is limited by trust assets, upside comes from a favorable deal announcement. "It's here to stay." — Joseph Schuster: Schuster’s view that SPACs and similar access-to-public-markets structures will remain part of capital markets.

Implications: Listeners should see SPACs and IPO ETFs as specialized, actively managed tools for accessing new listings and growth stories. The segment suggests these products can diversify portfolios, but they carry meaningful style, liquidity, and performance risks.