To the moon

Space is arguably the final frontier of capitalism. While the recent NASA Artemis II mission captures our imagination, another event has stirred investors’ imaginations.

Space Exploration Technologies Corp. (SpaceX), Tesla chief executive officer Elon Musk’s space company, reportedly filed initial paperwork this month for its initial public offering.

Likely the most anticipated and valuable privately held company to list on a stock exchange, SpaceX Technologies has targeted a market value as high as US$2 trillion, according to Bloomberg News.

Speculation aside, investors have reason to be enthusiastic, says Eva Ados, chief investment strategist at ERShares, an exchange-traded fund (ETF) provider. SpaceX “is very well-diversified: space, telecom, and AI (artificial intelligence).”

The company recently merged with Musk’s xAI, which operates the AI search engine Grok. SpaceX also includes Starlink, the world’s largest satellite service provider.

Starlink alone is deeply valuable as a disruptor of telecoms, Ados says. Yet SpaceX has several “moats,” competitive advantages over peers like Blue Origin (Amazon Inc. founder Jeff Bezos’s space company).

Ados says SpaceX is highly valued because it has built the most extensive commercialized space supply chain in history. What’s more, it will play a growing roll in future Artemis missions, providing lunar landing craft to develop the moon’s potentially vast resources.

ERShares is among a handful of ETF companies pushing innovative frontiers in their own right (within the context of the investment industry) — largely driven by interest in SpaceX. Its ERShares Private-Public Crossover ETF (XOVR) is effectively offering retail investors exposure to SpaceX before it goes public.

“There’s quite a few ETFs doing this,” says Elisabeth Kashner, director of ETF research at FactSet Insight in the San Francisco Bay Area.

That includes Baron First Principles ETF (RONB), launched in December, holding about 15 per cent of its assets in SpaceX.

Kashner adds these ETFs offering retail investors — mom-and-pop investors — exposure to privately held assets represent an interesting flex for ETFs. “The gold standard for ETFs is that their portfolios are sufficiently liquid to support proportional, creations and redemptions (of fund units).”

She says this ensures these funds trade easily.

The typical ETF mirrors an index like the S&P 500 — the largest, most tradeable stocks in the U.S. — for a low fee.

“Now, we’re seeing the introduction of securities that are not liquid (i.e. SpaceX) and don’t fit that model, and we’re watching what happens when those come into an ETF,” Kashner says.

The XOVR (called ‘Crossover’) ETF’s recent history illustrates potential challenges. In February, it saw more than $600 million in redemptions.

To meet demand to sell fund units, and create ones, XOVR also holds a portfolio of large, publicly-traded technology companies. That portfolio is built upon ERShares’ proprietary Entrepreneur 30 Index, developed by company founder Joel Shulman.

A professor of entrepreneurship at Babson College (Massachusetts), Shulman says his index “identifies entrepreneurial leaders, who are disruptors or innovators.”

Dating to 2005, the index includes Nvidia Corp. and Palantir Technologies Inc., among other tech companies.

“For 20 years, this beat the pants off everybody,” he says. The index’s total return since inception is more than 1,800 per cent. That tops even the NASDAQ 100 over that span.

Initially, the XOVR ETF consisted of only that index. But in 2024, ERShares pivoted to include SpaceX, using a special purpose vehicle — a fund holding SpaceX privately held shares.

The change was meant to “democratize” exposure to pre-IPO companies, Ados says. “Nowadays, all the growth happens when companies are private.”

That benefits institutional and ultra-wealthy investors, who can gain access before a company goes public. ERShares seeks to change that — as have other ETF providers — by offering access to a private company (SpaceX) before it lists for all investors.

Doing this through an ETF has many challenges, and risks for investors, says Lois Gregson, a St. Louis-based ETF market analyst, also FactSet.

She points to XOVR’s February selloff “amid speculation that perhaps it (SpaceX) wasn’t going to IPO.”

To meet redemption demand, the fund sold a lot of its public-traded positions, resulting in SpaceX’s weighting in the ETF increasing from about 15 per cent to 45 per cent.

That weighting far exceeds the U.S. Securities and Exchange Commission’s cap for ETFs that illiquid investments cannot exceed 15 per cent of a fund’s value.

“ERShares has had to do some fancy dancing” to avoid being forced to reduce SpaceX’s fund weight, Kashner says.

Recent reports — including one from National Bank of Canada — point to broader concerns about SpaceX’s valuation in the ETF. Ados recently stated XOVR’s SpaceX holding is estimated at US$205 million out of the fund’s US$477 million assets under management.

Gregson notes concentrated exposure can affect the ETF’s ability to redeem units given SpaceX, a private holding, can be more difficult to sell.

Yet Shulman argues SpaceX’s weight in XOVR is a reflection of the ETF’s goal: providing average investors as much exposure to SpaceX as possible. The other holdings merely provide ETF liquidity.

What’s more, private investments do trade, especially sought-after ones like SpaceX. One private market trading platform Hiive lists SpaceX’s value at US$800 a share.

Still, SpaceX’s valuation is more opaque than a publicly traded company.

XOVR’s premise — like other similar funds — may be offering exposure to SpaceX before its IPOs. At which point, it would become part of the ETF’s index, potentially pushing XOVR’s unit price substantially higher should SpaceX’s share price soar.

But the strategy has many risks. XOVR is a concentrated investment in one company. SpaceX’s estimated value at IPO may be more than US$1.75 trillion. Yet its true market price could differ substantially, and its listing may take longer than expected. Or SpaceX might never list.

Either outcome could negatively affect XOVR and similar funds.

“It’s a shiny new object,” Gregson says, understanding why investors are so transfixed.

For those that do invest, she underscores keeping the investment to a sliver of their overall portfolio, given the risks.

“You’re probably going to have as much fun investing $100 as you would $100,000.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com