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Leverage Craze Brings New ETF Targeting the SPAC Market

The RiverNorth Enhanced Pre-Merger SPAC ETF (SPCZ) launched last week, investing in so-called special purpose acquisition companies before they merge with their targets.


(Bloomberg) -- A new exchange-traded fund is looking to make leveraged bets on one of the worst-performing corners of the US equity markets this year, as the craze of amped-up strategies sweeps the ETF industry.

The RiverNorth Enhanced Pre-Merger SPAC ETF (ticker SPCZ) launched last week, investing in so-called special purpose acquisition companies before they merge with their targets. There are at least eight other exchange-traded funds in the US focused on blank-check companies, but this new fund would be the first that uses leverage, according to RiverNorth Capital Management Chief Executive Officer Patrick Galley. 

Sub-advised by RiverNorth and advised by TrueMark Investments, the actively-managed fund has the option of using swaps to offer leverage on individual SPACs or a basket of SPACs within the fund.

Asset managers are rushing to offer ETFs with amped-up strategies as the $6.2 trillion US industry grows more saturated and the novel products offer a way for issuers to charge higher fees. America’s first leveraged single-stock ETFs launched last week.

Read more: Wall Street Set for New ETF Gold Rush as Single-Stock Era Begins

When RiverNorth and TrueMark first filed with the Securities and Exchange Commission, the fund was called the RiverNorth SPAC Focus ETF. But the firms tweaked the fund name to emphasize its ability to offer leverage, adding the word “Enhanced.”

“We want to differentiate this fund from any of the other SPAC ETFs out there,” Galley said. 

Even as interest-rate hikes batter speculative trades such as blank-check companies, Galley sees it as an opportune time to launch. SPACs have tumbled about 22% this year, according to one index.

“If you look at the history of the SPAC market, the timing couldn’t be better,” Galley said. “We’d rather buy low, sell high versus buy high, sell low.”

SPACs raise money with the explicit purpose of making an acquisition, usually within two years. The money a SPAC raises in an IPO sits in an interest-paying trust, while its shares trade on an exchange like that of any other company.

But a vast majority of SPACs are now actually trading below, or at a discount to those trust values, thanks to an oversupply of blank-check vehicles, poor post-merger performance and growing worries that a vast majority of listed SPACs won’t actually find deals.

Buying SPAC shares at a discount is seen as a no-brainer by investors like Galley because even if the vehicle is liquidated, the full trust value is returned to investors. And if the SPAC ends up finding an acquisition target and its shares rise, then the fund could sell shares for a profit.

The fund will use leverage “opportunistically,” targeting SPACs that are trading at a discount, Galley said. The bigger the discount, the more leverage the fund would take on, he said.

Since July 12, the fund has fallen about 0.3%. It carries an expense ratio of 0.89%.

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