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SPAC’s Stumble Opens Door for an ETF to Bet on Bigger Declines

There are plenty of exchange-traded funds for when SPACs are shooting the lights out, and soon, one for when they’re hitting the skids.

Tuttle Capital Management on Wednesday plans to launch the Short De-SPAC ETF in a departure from most such funds in the market that have sought to capitalize on the boom in blank-check companies.

The ETF aims to make money on the stock losses of the 25 largest firms that have merged with special purpose acquisition companies. That includes once-hot stocks like Clover Health Investments Corp., Lordstown Motors Corp., Fisker Inc., Velodyne Lidar Inc. and QuantumScape Corp., which have each sold off this year as regulators clamp down and investors cool to these deals after an issuance bonanza over the past year.

The Securities and Exchange Commission started to review the accounting behind these instruments and issuance, and after-market performance has stumbled. The IPOX SPAC index, which reflects pre-deal SPACs, is down 25% from its February peak.

Short-sellers have also started to circle the sector, questioning the validity of the businesses. Chamath Palihapitiya-endorsed Clover Health took a dive after Hindenburg Research published a report earlier this year saying the health insurer misled investors. Clover’s response, reporting an SEC probe but also referring to “sweeping inaccuracies” from Hindenburg, helped it recover only some of the losses before shares resumed their descent.

History also shows that buying companies that emerge from SPAC combinations and holding them for one year results in an annualized loss of 15% on an equal-weighted basis, according to data from Jay Ritter, a University of Florida finance professor. But betting against them is tricky business, which the ETF aims to simplify.

Short-selling a company’s stock requires finding the shares to borrow, before selling them with the intention of buying them back later for less. For SPACs, in particular, those shares can be scarce and expensive to borrow due to supply-demand dynamics.

The Short De-SPAC ETF will use derivatives contracts, also known as swaps, to deliver the inverse return of the De-SPAC index. The index is rebalanced monthly.

“Mechanically it’s not easy to short. Either shares are hard to find or expensive to borrow, so the economics don’t make a whole heck of a lot of sense,” Matt Tuttle, chief of the Greenwich, Connecticut-based shop that puts out thematic and actively-managed ETFs, said in an interview.

Short-ETFs typically use swaps on the index, but the Short De-SPAC ETF will use swaps on individual securities. Because shorting SPACs even with swaps is difficult, the ETF may not track the index perfectly, Tuttle said.

The Short De-SPAC ETF will fly under symbol “SOGU.”

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