Eq: Total Market
There has been a lot of speculation over the last month about whether the market is in a bubble. The reason for this are numerous: the huge run up in large cap growth stocks, the meme stock frenzy and beyond. However, the answer to whether the market is in a bubble can be found in a recent study and paper by Harvard. Researchers from the university outlined what bubbles really are, and clearly show that by historical standards there is only one sector of the market currently in a bubble: the S&P 500 Technology Hardware, Storage & Peripherals index, which does include Apple. However, no other sectors, nor the S&P 500 itself could be considered to be in a bubble. In fact, it is quite rare for the market as a whole to be in a bubble. Rather, market bubbles are usually constrained to a small handful of sectors. This could be seen in what is considered to be one of the biggest of all time—the Dotcom bubble. In the late 1990s and early 2000s, tech stocks surged to extraordinary valuations, while many sectors, like value stocks, lagged. When the bubble burst, many sectors actually benefitted (like value stocks).
FINSUM: This history is quite useful for context, but as our readers know, we feel each market cycle is unique and thus historical insight can only take you so far. In this instance, we think it is important to take into consideration that bonds are yielding very little, meaning there is no good alternative to equities. We believe this situation—which is obviously created/supported by the Fed and government—will help continue to lift equities.
The market has been doing great. So great in fact, that many are nervous about a swift correction. Despite this, the market continues to push for new all-time highs each week. Credit Suisse weighed in on the market in a big way this week. To be clear, the bank is not exactly bearish on the market. Their overall position is “We have remained overweight equities on the back of highly supportive policy, a high ERP [equity risk premium], the start of a bond-for-equity switch and huge excess liquidity, while tactical indicators are not yet sending a sell signal”. That said, the bank warned that there was one very “high” risk to the market: the Fed. Credit Suisse thinks there is a good chance that the Fed suddenly gets less dovish in the second half of the year after some good growth in 1H. This would be a dramatic turn for investors and could risk a sharp reversal.
FINSUM: We have to agree with this risk. The huge stimulus and excess liquidity which are flooding the market are major tailwinds, so if they reversed, it would be a shock. The whole set up reminds of us what occurred in Q4 2018.
Special Purpose Acquisition Companies (SPACs) or “blank check companies” soared to notoriety in 2020. Though not a new financial instrument, they raised around $80bn from 237 deals in 2020, which is more capital than in the last decade combined. BlackRock CEO Larry Fink has even suggested that SPACs could come to replace the traditional IPO process.
So what can we expect from SPACs in the coming year and how can investors maximize gains in this space? Market conditions and the macroeconomic level both suggest an environment that will continue to support SPAC popularity. Low interest rates make SPACs a low opportunity-cost option. Combined with the downside protection of the cash being stored in treasury bills until a target company is identified, and the flexibility they offer in the option to pull out before the merger, they will remain a reasonable choice for those looking to capitalize on a post-Covid recovery and high equity valuations.
SPAC popularity has been propelled by the involvement of credible, experienced backers (Michael Klein, Bill Ackman etc.), something which seems unlikely to fade in the near future. Chamath Palihapitiya, for example, has formed 6 SPACs (A to E) ranging in value from $350m to $1bn, and has indicated his intention to complete the alphabet! According to BTIG there are 210 SPACs currently searching for an appropriate target company, with time limits of 18-24 months. And Goldman Sachs have suggested that more than $300bn worth of SPAC stock could be issued over the next two years.
SPACs are democratizing the traditional IPO process, giving financial advisors and individual retail investors access to an IPO private equity style of investing which had previously only been available to large institutions. But while the momentum continues, it’s not easy to pick the winners. Not all of the 2020 completed SPAC deals saw the strong growth of Virgin Galactic (up 73%) or Draft Kings (up over 400%) after their mergers. This is where a SPAC ETF offers exposure to this growing space, while mitigating the risk of backing one specific deal.
Defiance ETFs recently launched SPAK, the first SPAC ETF, which tracks a rules-based, weighted index of SPACs both in the pre-merger “blank check” stage (40% of the index) and for two years following the merger (60% of the index). SPAK thereby seeks to give investors diversified access to the whole flow of the SPAC IPO process, including the gains which can accompany and emanate from a successful merger. SPAK groups the most liquid, compelling and innovative SPAC and SPAC-originating companies, but potentially mitigates risk of overexposure to any one deal – no security in the index exceeds a relative value of 12%, and no more than 45% of the index is comprised of stocks that each represent over 5%. The index is passively managed, which explains its expense ratio (0.45%), while its constituents are reviewed monthly to ensure that the ETF captures the potential dynamism of the SPAC space.
The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 833.333.9383 or going to www.defianceetfs.com .
Investing involves risk. Principal loss is possible. The Fund invests in companies that have recently completed an IPO or are derived from a SPAC. These companies may be unseasoned and lack a trading history, a track record of reporting to investors, and widely available research coverage. IPOs are thus often subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection with the IPO prior to inclusion in the Index. The price of stocks included in the Index may not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition, IPOs may share similar illiquidity risks of private equity and venture capital. The Fund is new with a limited operating history.
Defiance ETFs are distributed by Foreside Fund Services, LLC.
n.b. This content was composed and paid-for by Defiance ETFs and is not FINSUM editorial.
 “2020 Has Been the Year of SPAC IPOs: Here Are the Prominent 4,” Sanghamitra Saha, December 28, 2020.
 “Goldman Strategists Say SPACs May Spur $300 Billion M&A Activity,” Joanna Ossinger, December 14, 2020.
 “Is Virgin Galactic a Buy After a New Space Stock ETF was announced?” Manisha Chatterjee, Jan 25, 2021.
 “DraftKings, Skillz SPAC Team Launch $1.5 Billion Spinning Eagle: What Investors Should Know,” Chris Katje, December 28, 2020.
According to both Morgan Stanley and Goldman Sachs, last week’s retail-driven chaos was nothing…Read the full story here on our partner Magnifi’s site.
Momentum funds often get bad press. While they have obvious utility, a lot of people say they feed bubbles and are subject to very big losses from market corrections. That said, some funds have started to do an excellent job at both hedging and outperforming to the upside. While that might sound impossible, it is not as hard as it sounds. The key is to follow the market’s movement, but not try to predict it. In other words, in strongly upward markets, you position yourself very bullish (e.g. 200% exposure). In downward markets, you take an inverse or short exposure to profit from losses. In a decent market you simply stay at 100% long exposure. By using this approach you can participate it more of the upside and lose less on the downside.
FINSUM: This is a smart strategy and one that some momentum funds are using to outperform the market right now. It can be employed either by buying funds or with an options strategy.
ESG has been getting more and more mainstream, and yesterday it likely took the final hurdle to major acceptance. A top asset manager with almost $1 tn in AUM announced that from here forward, all its new funds would be ESG. The manager is DWS group, which is majority owned by Deutsche Bank. According to DWS, “Sustainability is more than a corporate topic, it’s a society topic and an industry topic”. The move follows UBS’ recommendation last year that investors choose sustainable investing over traditional investing. However, according to some US financial advisors, these kind of moves will come slowly in the US. “There is too much assets tied up in old money and not enough advisor support,” says Jeff Glitterman of Glitterman Wealth Management.
FINSUM: We have to agree with Glitterman here. While BlackRock has certainly been a leader in the US, there is a reason a lot of these big announcements have been coming from European firms.