Space Sector ETFs: Sound Exciting, Aren’t (NASDAQ:UFO)

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Muted Downside, Muted Upside

Our note from last December covering the two space-sector ETFs (here) aged well. We rated at Neutral, said we were unexcited by their holdings, and thought they were best avoided.

What happened then was that each fund fell. OK. But what’s strange is that both space-sector ETFs – that’s Procure Space ETF (NASDAQ:UFO) and ARK Space Exploration & Innovation ETF (ARKX) – hold not the banzai startups you might expect – and in which case, the decline in each fund’s stock price would be in line with the general assault on growth stocks of all kinds – but instead are essentially value plays with the occasional growth name sprinkled in.

And since growth has been down, you would expect value to be up, ergo, you would expect these funds to have performed rather well versus the growth-heavy S&P and Nasdaq.

Here’s the top 10 holdings of UFO:

And the top 10 holdings of ARKX:

But here’s what has happened to each fund this year.

Underperformed the S&P despite the raid on growth all year, and despite the value-oriented positioning in the two ETFs.

The principal reason for this, of course, has nothing to do with the ETFs themselves; both hold perfectly sensible value names which investors might reasonably expect to perform well in risk-off 2022 year to date. Sadly for anyone thinking rationally in this way, neither growth nor value-at-large has performed this year, and that’s because energy has hogged all the money. Here’s the SPDR sector ETFs, year to date.

Only energy is up!

Now, going forward, a prudent investor might expect capital to rotate out of energy and into some other sectors, particularly those that have been beaten down. After all even if the market at large doesn’t go up, simply by moving large chunks of capital around from the high flyers to the roadkill, elevating the roadkill and then rotating back into the newly demoted – this can generate positive returns, as long as you have enough money to actually turn the remains of a roadrunner into a phoenix.

So we are expecting the most abused sectors – consumer discretionary, tech, maybe even crypto, who knows – to gain some standing in the coming months, at the expense of energy and maybe utilities.

If that’s right, we would expect that in the space sector, the riskier stocks will benefit more than the safe havens. So whilst the holdings of UFO and ARKX are for the most part perfectly sensible things to own, we don’t think these names will necessarily catch an asset-class bid. Whereas names like Spire Global (SPIR), Rocket Lab (RKLB), BlackSky (BKSY), Planet (PL), and Mynaric (MYNA)- here you have major upside potential from high growth companies proffering beaten-up stock prices, and you have proximate lows offering you a place to put stop-losses to keep yourself safe from, you know, yourself.

Indeed at least three of these names might have bottomed insofar as they have not made new lows since the May timeframe, despite the market at large having dropped in June. Spire, Planet and BlackSky are each in the business of earth observation – optical spectrum in the case of PL and BKSY, RF for Spire – and this looks to be a going-up sector with more spending coming from government recently. (Maxar Technologies (MAXR) is also likely to benefit from this – it’s a holding in UFO).

In the space sector, for now, we continue to prefer holding individual stocks. In staff personal accounts we own a mixture of early-stage growth (SPIR, PL, MYNA) and value (MAXR, IRDM) names and anticipate sound upside from here.

Cestrian Capital Research, Inc – 22 June 2022