On January 23, a unique exchange-traded fund (ETF) named ERShares Private-Public Crossover ETF witnessed an overwhelming influx of over $120 million since acquiring SpaceX shares last December, marking a record for the fund in its seven-year historyThe dramatic wave of investment highlights not only the increasing popularity of the fund but also its impressive rebranding and recalibration strategy which caught the attention of a wider investor base.
ERShares is a modest-sized ETF firm that had previously attempted to manage an ETF focused on entrepreneurs but struggled to gain traction and visibility in the crowded investment marketHowever, fortunes shifted dramatically when the firm decided to revamp its strategy and stock symbol, steering heavily into the inclusion of SpaceX stock in its portfolioThis shift was the catalyst that propelled the firm from being a relatively unnoticed entity in the financial landscape to a "star" fund.
Reports reveal that on December 2, just a week before they placed a bid, they ramped up their acquisition of SpaceX stocks, setting a higher purchase price that resulted in investors reaping a 37% return almost instantlyJoel Shulman, the founder of the XOVR fund, noted that the fund holds SpaceX shares through a special purpose vehicle while the specifics of purchasing remain undisclosedAs a result, SpaceX has surged to become the largest holding in this ETF, accounting for 8.1% of the total fund, which itself has ballooned to $250 million in assets.
SpaceX, being a private company, presents a unique challenge for investors eager to get a piece of its action, as those shares are not traded on public marketsMajor fund managers, from BlackRock to Invesco, find themselves in a race to provide investors with pathways into these coveted private markets through vehicle such as ETFsCurrently, XOVR stands out as the only publicly traded ETF in the United States that holds SpaceX stocks, effectively serving as the singular access point for retail investors looking to venture into this high-profile private enterprise.
The enthusiastic response from retail investors reflects in the significant capital inflows the fund has experienced
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Shulman revealed that the fund receives numerous small order subscriptions, often amounting to just hundreds of dollarsDiscussions regarding the fund have also popped up on social media platforms such as Reddit, further amplifying its appeal among at-home investors.
However, not all that glitters is goldIndependent ETF analyst Dave Nadig offered a cautionary perspective on the potential pitfalls facing XOVRHe pointed out that rapid growth in the fund size without a concurrent increase in the acquisition of SpaceX shares could lead to dilution of actual investor positions in SpaceX stockMoreover, due to the illiquid nature of SpaceX shares, the fund is susceptible to risks of trading at a net asset value premium or discount.
The U.SSecurities and Exchange Commission has regulations that limit the proportion of illiquid investments that open-ended funds may possess to 15% of net assetsTherefore, if SpaceX shares were to experience an unexpected surge, XOVR might cross regulatory thresholds, forcing it to divest its holdingsConversely, if SpaceX encounters difficulties, questions regarding the valuation of those shares could become particularly contentious.
A startling discrepancy arises concerning the reported price of SpaceX shares across different platformsFor example, while the XOVR website lists the price at $185, the private equity trading platform Forge quotes it at $213, revealing a gap of $28 that can create confusion among investorsFor buyers of XOVR, navigating through these murky waters is akin to wandering in a fog—without the clarity of knowing the exact price at which they are acquiring SpaceX shares until the following day upon re-evaluating their portfolio.
Nadig stressed that the lack of transparency and liquidity around SpaceX shares, coupled with the opaque pricing policies of XOVR, poses unique and challenging issues for this particular ETFDespite his criticism regarding XOVR's handling of transparency and missed opportunities, he implored the fund to consider pragmatic solutions
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