From SPACs to Space

William Ehart

WAS MARCH WHEN YOU learned what a nonfungible token was, because a digital file sold for $69 million? Was it when you told yourself you just had to find out more about SPACs? When you realized that the nation’s hottest fund manager, Cathie Wood, who you first heard about in February, was now a household name referred to simply as Cathie? As in, “Why does Cathie own Deere and Netflix in her new space exploration ETF?”

Then you and I are most definitely late to the party—and it’s probably best not to start dancing on the tables with the others.

With celebrities such as baseball great A-Rod and singer Ciara getting involved with SPACs, or special purpose acquisition companies, the Securities and Exchange Commission felt compelled to warn investors on March 10 against investing based on star power alone. Eccentric Tesla Chief Executive Elon Musk, who reportedly briefly eclipsed Amazon’s Jeff Bezos as the world’s richest person, took his turn at the karaoke mic on March 15, offering to sell a tweet, which includes a link to a song about nonfungible tokens (NFTs), as an NFT.

Josh Brown of Ritholtz Asset Management described the “grotesque spectacle” best in his March 16 blog post, “Reverse Wealth Transfer on Steroids.” He advised younger investors, “Do not buy SPACs, digital currencies or nonfungible tokens sold to you by millionaires and billionaires with your stimulus check…. They don’t love you back.” He suggested more worthwhile pursuits, such as upgrading your apartment so you can bring a date home. The Wall Street Journal summed things up this way: “Meme Stocks, NFTs, Tech Rotation Dominate Crazy Quarter on Wall Street.”

HumbleDollar exists to provide timeless, simple advice to everyday investors. Yes, your best bet is to buy and hold a diversified portfolio, preferably one built using index funds. No, you don’t need to know much about today’s overhyped investment products, except that they may be a sign of irrational exuberance. Buying NFTs and celebrity SPACs? As they say in poker, “If you’ve been at the table for 30 minutes and you don’t know who the patsy is, you are.”

Hot and not. The S&P 500-stock index closed the first quarter near its record high, which was set March 26. But it was value stocks, especially in the small- and mid-cap segments, that led the way in this year’s first three months. The Vanguard Small-Cap Value ETF gained nearly 17%, versus the iShares Core S&P 500 ETF’s advance of just over 6%. The large-cap oriented Vanguard Value ETF rose more than 11%. Reflationary plays dominated as ETFs representing the energy, financials, leisure, industrials and materials sectors all posted double-digit gains, with real estate not far behind.

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Meanwhile, gold and bond ETFs—especially those owning long-term Treasurys—fell sharply. Bloomberg reported that this year’s first three months was the worst quarter for Treasurys since 1980. The iShares Core US Aggregate Bond ETF fell 3.4%. The Vanguard Long-Term Treasury ETF dropped 13.4%.

Dollar demand. Helped by a spike in U.S. Treasury yields back to pre-pandemic levels, the dollar has gained 3.6% against a basket of six major currencies so far this year. That has held back returns on international funds. The iShares MSCI EAFE ETF, which tracks developed country performance, gained 4%, as did the Vanguard FTSE Emerging Markets ETF. But foreign value stocks still outperformed the S&P 500: The iShares MSCI EAFE Value ETF jumped 8%.

ARKs in space? Or falling to earth? Talk about a star fund manager. The aforementioned Cathie, whose actively managed ARK Innovation ETF has gained more than 46% per year over the past five years, debuted the ARK Space Exploration and Innovation Fund on March 30 to heavy trading volume. But her flagship fund fell 8% in March and nearly 4% in the first quarter, while concerns grew about its heavy ownership of illiquid stocks.

Aggravating those worries: Late last month, ARK Invest amended fund prospectuses to eliminate certain stock ownership limits in its ETFs. The amendment would allow each fund to invest as much as 30% of fund assets in a single company’s securities and own as much as 20% of any single company or fund’s shares. There was no way to predict ARK Innovation’s stellar performance five years ago, but what we can predict is that the fund family’s tremendous asset growth will make it awfully difficult to beat the market in the years to come. In investing, the word “gravity” is spelled “reversion to the mean.”

Sputtering SPACs. The boom in SPACs fueled the strongest quarter for global mergers and acquisitions since 1980, with deals worth $1.3 trillion, the Financial Times reported. Indeed, SPAC issuance in the first quarter of $97 billion has already topped the $83 billion recorded for all of last year. There were 298 SPAC initial public offerings (IPOs) in the first quarter, compared with 248 last year and just 59 in 2019. But it seems there’s a limit to everything: First-day SPAC IPO share price performance was uncharacteristically flat in March, The Wall Street Journal reported.

Credit where it’s due. In January, consumer revolving debt—which is mostly made up of credit card debt—fell to its lowest level since 2016, according to the latest Federal Reserve figures. With new federal stimulus payments of $1,400 still hitting Americans’ bank accounts, consumer spending could be poised for a huge increase. In fact, some are expecting an historic economic boom this year. On March 15, Goldman Sachs predicted 8% GDP growth in 2021, which would be the highest since 1951.

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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Roboticus Aquarius
Roboticus Aquarius
1 year ago

I think buying into SPACs now is a particularly bad idea. Not only are they a miniscule portion of the market, so there is no need to invest – but also, best as I can determine, they are structured to benefit pre-retail investors. Like starting a marathon from a mile behind your competitors.

I just don’t get NFTs. Listen, I go beyond nuts with admiration every time I see Jeter’s flip in the 2001 ALDS, but I have zero desire to own some first issue media record of it.

I’m rooting for ARKK to stay afloat, but I’m not willing to risk much on it. Less than 0.1% of my portfolio, actually. For me, this is entertainment, not investing.

Dollar Demand. This one confuses me. I’m seeing charts that suggest a big recent decline in demand for the dollar, and yet, price keeps increasing. In situations like this, the value of a consistent diversified portfolio become a lot more clear – a sudden reversal here and I’m positioned to take advantage of it, but if there is no reversal I’ll still do fine.

Last edited 1 year ago by Roboticus Aquarius
1 year ago

I get antsy when returns are this good. I’m still contributing to my portfolio each month, but I can’t help but feel that I’m not getting a good deal with the CAPE ratio being so high. Yes, there are reasons to be optimistic about 2021, but this year’s rally still makes me uncomfortable. Then again, investing during an all-time high has not been so bad historically.

So far, I’ve just been investing in a dead-simple two-fund portfolio. However, I’m considering tilting my IRA into small-cap value stocks, and also upping my international allocation slightly (from 20% to 25%). I’ve resisted adding more funds to my portfolio because I value simplicity so much, but I’m beginning to reconsider. The main thing holding me back is the higher expense ratios of small-cap value ETFs like AVUV relative to total market funds like VTI.

Also, I feel sorry for Cathie Wood. I find her investment thesis to be really interesting, and she’s a gifted storyteller, but I’m bracing myself for the day when ARK falls apart. Morningstar shares my concerns.

Last edited 1 year ago by Thomas
Roboticus Aquarius
Roboticus Aquarius
1 year ago
Reply to  Thomas

I have also shifted slightly to international… and my small cap total is unchanged, but my tilt to SC growth is gone, with a balance of scg/scv in it’s place. I’m not sold on the long term resurgence of value, small caps, or international.

FYI, it seems like higher expense ratios correlate to stronger value/smallcap tilts, so AVUV and RZV cost more but appear to have a purer SCV exposure. AVUV has a negative momentum screen that RZV lacks, last I knew. Anyways, for SCV you also might consider VIOV at 15 bpts or VBR at 7 bpts. I think of VIOV as my sweet spot between cost & size/value exposure.

All that said, while I’m aware of some factor details, I’m not sold on them either. We apply statistical analysis to data that doesn’t actually fit the initial conditions required for that analysis to be valid, so as always it’s buyer beware…

Last edited 1 year ago by Roboticus Aquarius
1 year ago

Thanks for the recommendations. Yeah, I’m not completely convinced that the value premium still exists, although I also don’t have any evidence that it doesn’t. There are behavioral arguments as to why it can’t just be arbitraged away, which seems plausible to me. I figure in the worst-case scenario a value fund will endure a bit more volatility for a similar return to a total market fund in the long run. I’m young enough that I’m willing to take a bit of a gamble for marginally higher returns. And it’s not like I would go all-in on SCV, it would be a small (10-15%) tilt.

That said, it is nice only owning total market funds. By the time the premium from the value factor (if it exists) produces a substantial difference in the size of my portfolio, I will probably be rich/old enough that more money won’t materially affect my lifestyle. So maybe I should listen to John Bogle’s advice and keep things simple.

Last edited 1 year ago by Thomas

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