SPACs: An incomplete asset class?

Special-Purpose Acquisition Companies (SPACs) have surpassed the initial public offering (IPO) in volume this year, and some have praised them as a new asset class that all investors should add to their portfolios. For what purpose? It is assumed that they generate higher returns and can provide diversity benefits compared to other forms of equity.

But are these diversity benefits real or illusory? To find out, we conducted a full sample analysis of the listed SPACs starting in November 2020.

SPACs are securities through which investors can accumulate their money in a blank check fund that sits and waits for target companies to make purchases and identify them to the public. This time when the SPAC is evaluating potential targets is called the “pre-contract” stage. After targeting a company and thus making it public, the “post-contract” episode of SPAC begins.

To study the impact of SPAC on a portfolio, we collected data from all SPACs listed since November 2020 and selected CNBC SPAC 50 to serve as an index representing our diverse portfolio of SPACs. CNBC SPAC tracks the 50 largest US-based pre-merger blank-check deals in terms of 50 market caps.

For the post-contract phase of the SPAC, we used the CNBC post-contract SPAC 50, which consists of a combination of SPAC that has found a goal and become universal.

So how did SPACs work before and after contracts and against the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000, and Tech Exchange-traded Fund (ETF) SPDR XLK?

Between November02020 and April 1, 2021, the pre-contract of the SPAC 50 worked 12.5% ​​to 17.61% or less than about 5 percentage points.

SPACs vs. Key Indicators, 30 November 2020 to 1 April 2021

Return Instability
SPAC 50 pre-deal 12.15% 26.52%
SPAC 50 Post-Deal 17.61% 44.31%
S&P 500 11.00% 14.30%
Dow 11.86% 12.33%
Nasdaq 10.50% 21.50%
Russell 2000 23.85% 25.16%
XLK 10.21% 22.13%


Both SPAC indices show more volatility than all other major indices. Volatility and performance variability are reflected in the individual SPACs within these indices.

Among the post-contract SPAC returns, there is considerable dispersion. The bottom quarter of the fund’s performance averages -30%, while the top quadruple averages 81%.

Financial Analyst Journal Current Issue Tile


But what about the diversity benefits of SPACs? How do SPAC 50 indices relate to all major equity indices?

Pre-deal SPACs have a correlation coefficient of 0.43 with the larger stock index. But once the SPACs become universal, the correlation coefficient is up to 0.53. This suggests that SPACs may offer some diversification benefits at the pre-contract stage, but those benefits are significantly reduced after contract execution.

SPAC performance is related to some indicators compared to others. At the pre-contract stage, SPACs were most closely related to the Nasdaq Composite, which had a correlation coefficient of 0.50. SPACs, on the other hand, continued to follow Russell 2000 with a correlation coefficient of 0.66 after the deal.

SPAC 50: Pre-deal reciprocity

S&P 500 0.44
Dow 0.33
Nasdaq 0.50
Russell 2000 0.45
XLK 0.43

SPAC 50: Post-contractual relationship

S&P 500 0.49
Dow 0.37
Nasdaq 0.61
Russell 2000 0.66
XLK 0.52

These correlation coefficients are quite high across the board. In fact, they are much higher than between equity and bond indices over the same period. The Vanguard Total Bond Index of the SPAC 50 Index had a correlation of 0.068, compared to the 0.112 correlation of the S&P 500 with the Bond Index.

The claim that SPACs form an incomplete asset class is much more vague than public equity. Even at their pre-contract stage, SPACs have a weak positive relationship with equities. This means that they may offer some diversification benefits, but nowhere near the standard total bond index.

So if the goal is portfolio diversification, SPACs don’t seem like the best option.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / leolintang

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Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, an expert on exchange-traded funds (ETFs) and mutual fund performance. He currently serves as the new director of financial planning and asset management at George Mason and established the first student-led investment fund at GMU.

Why Nguyen

Hoai Thuong Nguyen is currently in his final semester at George Mason University. He is a member of a student-run investment fund and is ready to graduate soon. He will join the University of Windsor’s Masters Finance and Accounting program next fall. His focus is on securing a position in the environmental, social and governance (ESG) investment and accounting industries.

Abdullahi Eli Telmudi

Abdullahi Eli Telmoudi, the current senior at George Mason University, is determined to graduate in his final semester and among the best in his class. He will begin his postgraduate degree in global finance at Fordham University next fall. He is interested in global finance, global leadership and international development and aims to secure the position of financial analyst in an international corporation.

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