An exchange-traded fund from a relatively unknown shop is catching the attention of online traders and gathering flows after investing in Elon Musk’s SpaceX.
The ERShares Private-Public Crossover ETF (ticker XOVR) has raked in more than $120 million since buying shares of the private rocket and satellite company in December. That’s the best stretch of flows in its seven-year lifespan, and it’s helped the fund grow its assets to $250 million.
Major money managers from BlackRock Inc. to Invesco Ltd. are competing to offer investors access to private markets through ETFs. But as of Friday, XOVR is the only US-listed ETF that holds SpaceX, according to CFRA Research, giving smaller investors exposure to one of the hottest private companies.
“A lot of the stock in these companies are either held by private equity investors, VCs or by employees or other types of insiders,” said Aniket Ullal, head of ETF research at CFRA. “So access to the actual underlying stock would be a big hurdle.”
SpaceX’s shares don’t trade on a stock exchange, making investing in the company difficult. In some cases, an asset manager can own and run a pooled fund that has several shares of a single private company, allowing investors to hold smaller slices.
XOVR owns SpaceX through a special purpose vehicle, said Joel Shulman, founder of ERShares, who said that how the fund purchases the private shares is confidential.
SpaceX is the ETF’s first private holding since it changed its name in August and added private companies to its investing mandate, which also includes public entrepreneurial companies. It’s also the fund’s top holding at the moment, with an 8.1% allocation. The Securities and Exchange Commission has a 15% cap on open-ended funds holding illiquid investments.
Obstacles
One hurdle to buying anything illiquid — like shares of private companies — is that it can cause an ETF to trade at a premium or discount to the net asset value, potentially leading to hidden costs for investors. While SpaceX was most recently valued at about $350 billion, after an insider share sale in December, it’s not clear how the fund is valuing shares of the company on a daily basis in order to meet its creations and redemptions.
As the fund grows, it would need to acquire more SpaceX holdings to avoid diluting the position.
“If you buy now, you’re diluting the SpaceX position for everybody else who bought in,” said Dave Nadig, an independent ETF analyst. “So if this fund is extraordinarily successful and they’re unable to acquire SpaceX shares, a 9% SpaceX position you thought you were buying into to very quickly can become a 2% SpaceX position.”
Despite these possible quandaries, the fund seems to be catching on with retail traders, as evidenced by the size of the buy orders, which Shulman says are often just in the several hundreds of dollars at a time. There’s even a tiny subpage on Reddit dedicated to the fund, and XOVR has come up in discussions on other ETF and stock-trading forums.
To Shulman, many successful large companies no longer want to go public, citing reasons like nuisance lawsuits, and he think it’s unfair that retail investors are blocked out of accessing them.
“When you see a company like SpaceX, which has gone from $100 billion to $350 billion in a couple of years — that’s a 300% appreciation that the public market has been shut out of, while the institutional investors, the credit investors are getting it,” he said. “The people on the sidelines have to just watch.”
On Bloomberg Television’s ETF IQ earlier this month, Shulman said that while XOVR’s public stocks will be rebalanced quarterly, it will add to and adjust its private holdings “opportunistically.”
“SpaceX is a long-term hold for us. We’re not going to change that at all, in fact we may add to it,” Shulman said on ETF IQ. “Right now, if somebody wants this position, it’s the easiest way they can get into it.”
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