SPACs: An uncorrelated asset class?

The volume of Special Purpose Acquisition Companies (SPACs) has exceeded traditional initial public offerings (IPOs) this yr and a few have hailed them as a brand new asset class that every one investors should include of their portfolios. For what purpose? They supposedly generate higher returns and might also offer Diversification advantages in relation to other types of equity.

But are these diversification advantages real or illusory? To discover, we conducted an evaluation of the complete sample of SPACs that went public starting in November 2020.

SPACs are securities that allow investors to pool their money into blank check funds waiting to discover goal corporations to purchase and take public. This phase, during which the SPAC reviews potential targets, is often known as the “pre-deal” phase. After an organization is targeted and acquired, thereby taking public, the “post-deal” phase of the SPAC begins.

To examine the SPAC effect on a portfolio, we collected data on all SPACs which have gone public since November 2020 and the CNBC SPAC50 as an index representing our diversified SPAC portfolio. The CNBC SPAC 50 tracks the 50 largest pre-merger blank check deals within the U.S. by market capitalization.

For the SPAC post-deal phase, we used the CNBC Post-Deal SPAC 50, which consists of SPACs which have found a goal and gone public.

How did SPACs perform before and after the deal and in comparison with the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite, the Russell 2000 and the technology ETF SPDR XLK?

Between November 30, 2020 and April 1, 2021, the pre-deal SPAC 50’s performance lagged 12.15% versus 17.61%, or about 5 percentage points behind the post-deal SPAC 50.

SPACs vs. major indices, November 30, 2020 to April 1, 2021

volatility

Both SPAC indices exhibited higher volatility than all other major indices. The volatility and performance variability is reflected in the person SPACs inside these indices.

There is considerable variation within the post-deal returns of SPACs, with the underside quartile of fund performance averaging -30%, while the highest quartile averaged 81%.

Diversification

But what in regards to the diversification advantages of SPACs? How do the SPAC 50 indices correlate with all major stock indices?

Pre-deal SPACs, on average, have a correlation coefficient of 0.43 with the main stock indices. However, once SPACs go public, the correlation coefficient rises to 0.53. This suggests that SPACs may offer some diversification advantages within the pre-deal phase, but these advantages diminish significantly after the deal closes.

The performance of SPACs was more highly correlated with some indices than others. In the pre-deal period, SPACs were most highly correlated with the NASDAQ Composite, with a correlation coefficient of 0.50. Post-deal SPACs, alternatively, tended to follow the Russell 2000, with a correlation coefficient of 0.66.

SPAC 50: Pre-deal correlation

The SPAC 50: Post-deal correlation

These correlation coefficients are quite high across the board. In fact, they’re much higher than those between stock and bond indices over the identical period. The SPAC 50 Index had a correlation of 0.068 with the Vanguard Total Bond Index, in comparison with the correlation of 0.112 between the S&P 500 and the bond index.

The claim that SPACs are an uncorrelated asset class in comparison with equities is totally unfounded. Even within the pre-transaction phase, SPACs have a weak positive correlation with equities. This implies that they could offer some diversification advantages, but they’re nowhere near those of the usual total bond index.

So if the goal is portfolio diversification, SPACs don’t appear to be one of the best option.

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Photo credit: ©Getty Images / leolintang