ARKX, UFO, ROKT: What you should know about Space ETFs

Space has always been a fascinating mystery. Though space adventures are just a daydream for most people, being able to participate and invest in its economy creates a lot of excitement.

US investors looking to invest in Space ETFs have plenty of choices with ARKX, UFO and ROKT ETFs already on the market. The ETF space race is now reaching European investors too. They will soon be able to buy a YODA ETF.

What’s behind all the space-aged hype? Here’s a list of what you should know before you invest in those ETFs.

Space ETFs: a look at the universe

The ARK Space Exploration & Innovation ETF (ARKX) is the biggest Space ETF by assets with more than $600mn under management. It’s one of the eight funds currently offered by Cathie Wood’s ARK Investment. The firm made a lot of noise in the industry in 2020 thanks to astonishing performance on its thematic investments. Launched in March 2021, the ARKX ETF is actively managed, meaning that it does not follow a benchmark.

The SPDR S&P Kensho Final Frontiers ETF (ROKT) was the earliest ETF to try to capture the theme. It was launched in 2018 by SPDR. The ‘pioneer’ ETF also has a lower cost than its peers at 0.45% per year. ROKT replicates the S&P Kensho Final Frontiers index that measures the performance of companies at the forefront of deep-space and deep-sea exploration and development.

Lastly, the Procure Space ETF (UFO) is a passive ETF that tracks the S-Network Space index, targeting companies engaged in space-related businesses. Launched in 2019, UFO will soon see its European equivalent, the YODA ETF, which will start trading in June 2021. YODA will also be issued by ProcureAM and will follow the same index as UFO. The providers’ move to offer a UCITS version will allow more investors to take part in Space’s exciting investment journey.

More than space rockets

As a matter of fact, space investing is not just about rocket ships and conquering Mars.

A recent article by the Financial Times ETF Hub warns investors that Space ETFs may fall short of their expectations, as they often have ‘only tenuous connections to the commercial possibilities of outer space’.

Instead of pure space players, investors will find that Space ETFs are buying the likes of Amazon, Tencent or even Netflix. Space-related activities encompass more than just aerospace companies. Space ETFs can invest in aerospace companies’ beneficiaries, such as broadcasting, as well as companies producing the technology enabling space exploration.

Space tourism might soon become a reality, but as of now, beyond the military and satellite manufacturers, opportunities are more focused on traditional sectors rather than a Space theme. Investors must be aware that this will be reflected in the stocks held by the Space ETFs.

Different takes on the Space theme

Despite covering the same investment theme, the three space ETFs have little in common. We have compared their holdings and it turns out ARKX, UFO and ROKT share just over 20% of their holdings.

Despite holding different baskets of stocks, those ETFs do not bring completely different outcomes for investors. For example, their performance has been somewhat similar. Looking at their historical returns we see some correlation, meaning they tend to move up and down together (even if not in the same proportions).

To understand why that is, investors should consider the ETF exposure on a higher level than stocks. Each stock can be decomposed into a different set of risk exposures (or ‘factors’). Those risk exposures are the main drivers explaining a stock’s return. Among the principal risk factors are the geographical zone or country of the company, its industrial sector or the size of its market capitalization. Other factors such as value or growth attributes can also be considered.

Looking at their risk exposures, we find that ARKX, UFO and ROKT actually share quite a lot in common. Their portfolios turn out to be more than 70% similar overall. This is much higher than the 20% we got from looking at stocks directly. Considering exposures to industrial sectors alone, we find that their overlaps range between 45% to 65%.

Compared to ARKX and UFO, ROKT seems to have an ‘all-in’ strategy regarding sector exposures, with more than 80% of its portfolio concentrated in the industrial sector. It’s also more concentrated in US companies than its two peers. However, they all invest in stocks with large and mid-capitalizations. They also tend to invest more in Value stocks. Those are stocks deemed to be undervalued at current market prices.

All three ETFs also have relatively a low number of stocks in their baskets. This might be a consequence of the limited investment opportunities in the space economy. UFO and ROKT’s portfolios contain close to 30 stocks and ARKX counts just a little more at 40. Those are concentrated portfolios: by comparison famous US stocks ETFs usually hold from 300 to over 1,000 stocks!

Our analysis also reveals that the effective number of holdings, as measured by the HHI index, is even lower for the three Space ETFs. Their effective diversification level actually corresponds to just 25 stocks if they were held in equal proportions in the ETF baskets.

Conclusion

Space is an exciting investment theme, but it is also an industry that still needs clarification. Recent progress in the sphere may trump investors’ expectations for their investment in space-related activities.

US investors can choose amongst three ETFs to participate in the space economy: ARKX, UFO and ROKT. While they do not own exactly the same set of stocks, they remain pretty similar and share the same risk exposures globally. This means the difference in their returns can be attributed to different stock-picking strategies. Each ETF provider has its own area of expertise and will bring added value by betting on different companies within the (broad) space economy theme.

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