Fund Focus: beyond Space X - the next frontier of space stocks

The Space Exploration Technologies Corp Class A (NASDAQ:SPCX) initial public offering (IPO) has highlighted two very different investment opportunities, depending on your specific outlook.

Some investors will see it as a demonstration of the momentum now gathered behind the theme and a sign to get invested in SpaceX itself or similar stocks.

Those with a more cautious view might see it as a sign the theme (or the market generally) is running a tad hot – and spot an opportunity to take profits on the likes of Seraphim Space Investment Trust Ord (LSE:SSIT) and early SpaceX backer Scottish Mortgage Ord (LSE:SMT).

We, of course, can’t tell just yet which camp is right. 

But there is clearly continued appetite for the space theme, as demonstrated by the presence of the VanEck Space Innovators ETF A USD Acc GBP (LSE:JEDG) in our bestselling exchange-traded fund lists of recent months. Investors interested in backing the theme may well ask what else is out there, beyond SpaceX.

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Thematic ETFs can give us a good sense of the shares most obviously associated with a theme – whether you view these as winners or crowded trades. 

And a few space funds now exist. Last year, we had Cathie Wood’s Ark launch the ARK Space & Defence Innovt ETF A USD Acc GBP (LSE:ARCX), having already run a space-focused fund for investors outside Europe.

With that and the VanEck fund plus two other space ETFs, iShares Space Technologies ETF USD Acc GBP (LSE:STRR) and the WisdomTree Space Economy ETF USD Acc GBP (LSE:WSPG), which launched roughly in time with the SpaceX IPO, we have a good number of portfolios to pick for ideas.

Some space plays

The table outlines the top 10 holdings from the most established of the four ETFs, VanEck Space Innovators, and ranks them by how many times they crop up in the top 10 lists of all four.

Funds do tend to coalesce around the same few shares when it comes to nascent themes. And while we do see some of that, just one name ranks as a major holding for all four of the portfolios analysed here.

That’s Rocket Lab Corp (NASDAQ:RKLB), which describes itself as an “end-to-end space company”. It offers launch services, spacecraft and satellite components, among other things, and has customers in commercial, civil, defence and academic sectors. 

Given that they mostly just track an index, thematic ETFs won’t usually give much sense of a rationale for holding a stock. But ARK, being an active manager, has noted that it exemplifies “the convergence of commercial and defence space applications”, with its Electron and Neutron launch systems used “for both national security payloads and commercial satellite constellations”.

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Rocket Lab, which entered public markets via a merger with a special purpose acquisition vehicle in 2021, does demonstrate some of the big moves we associate with this theme. The shares are up by around 160% over a year, but down by almost 12% over the last month.

There’s also plenty of corporate activity in a sector where valuations are on the rise, and that’s not limited to IPOs. Rocket Lab recently announced that it had agreed to buy satellite services provider Iridium Communications Inc (NASDAQ:IRDM), another name in the table, at $54 per share. 

Other names

Fans of our DIY Investor Diary series might recognise the second name in the table, AST SpaceMobile Inc Ordinary Shares - Class A (NASDAQ:ASTS), which appears in the top holding lists of the VanEck, iShares and WisdomTree funds. In March, we noted that one ii customer had ditched tracker funds over time and instead bet heavily on his favourite stocks – with this company representing most of his portfolio.

As with SpaceX’s Starlink division, the company feeds into the theme of satellites being used for telecoms, with its SpaceMobile cellular broadband network designed to connect directly to smartphones. We similarly see Viasat Inc (NASDAQ:VSAT) focusing on high-speed broadband.

Planet Labs PBC Class A (NYSE:PL), meanwhile, focuses on the design, construction and launch of satellites to provide high-quality imagery of the earth. That could work in various different areas, from military use to environmental sustainability projects.

Investments or inspiration?

A recent episode of our On The Money podcast highlighted the fact that thematic ETFs can invest in very hyped parts of the market, leaving investors exposed to a pullback. But even if you don’t rate such funds, they can provide some useful information about the stocks most associated with a given theme.

For those who do want to use such funds, it’s worth looking at how concentrated the portfolio is, what subsectors they might be targeting, their geographic focus and their fees.

To look at the most established example from this sample, the VanEck ETF is relatively concentrated with just 25 holdings and roughly 8% of the portfolio apiece in Viasat, AST SpaceMobile and Rocket Lab.

About 70% of the portfolio is in the US – something that can often happen with more growth-focused thematic funds – while by sector roughly half the fund is in industrials.

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The iShares and WisdomTree funds are a bit more spread out, with 85 holdings in the former and around 50 in the latter. And both are a fair bit heavier on industrials.

None of those three are the cheapest offerings – the VanEck fund has a yearly 0.55% fee, while the other two are on 0.5% - but investors may well see value here for such a specialism.

Finally, if you do invest then keep an eye on the presence of SpaceX in such funds. 

It doesn’t sit in the VanEck ETF at the time of writing but makes up almost 5% of assets in both the iShares and WisdomTree funds. That could well grow over time.