With the soaring interest in space exploration, it’s logical that fund companies are looking to expand their universe of available products to tap into this demand. Our 3 Stocks for the Space Race article featured three listed companies that could benefit from the boom in space tourism and satellite technology. But can investors take a broader approach to this theme via funds and trusts?
Investing in Space ETFs
ETFs (exchange traded funds) are often a good way for investors to tap into growing trend such as artificial intelligence, consumer behaviour and even timber. That should make space exploration a good fit for ETF investors who don’t want to take the risk of picking speculative stocks themselves.
But Morningstar passives analyst Kenneth Lamont points out that the choice is limited. In the US , there are already five ETFs focusing on the space race, with combined assets of $800 million. One of these is the Procure Space ETF (UFO), which is rated Bronze under the new Morningstar Quantitative Rating (MQR). A UK-listed version of this ETF launched in June 2021 and Lamont desribes it as a “carbon copy of its US cousin”.
Lamont urges caution for potential investors, particularly as the sector is high reward/high risk, and the UK listed fund is concentrated with just 30 stocks in its portfolio. The US ETF has been much more volatile than its benchmark, the MSCI World, since launch. “The fund’s narrow focus means it can be considered a high conviction strategy,” says Lamont. “It's best deployed as a satellite holding within an already broadly diversified portfolio.”
Benchmarking is also something that investors need to be aware of, and is a common issue with thematic ETFs, which can't be easily compared with broader indices like the S&P 500 or FTSE All Share. Lamont also points out that the Procure ETF may not offer the "pure play" exposure investors hope because space exploration makes up a small part of revenues in some of the stocks it holds, like Boeing (BA).
ESG is another consideration, as companies in the sector like Lockheed Martin (LMT) are also manufacturers of military hardware. “Those sensitive to ESG concerns should take note that the fund has a 20% exposure to companies engaged in military contracting and 15% exposure to those involved in the manufacture or sale of controversial weapons,” Lamont says.
Investment Trusts for the Space Race
ETFs can only invest in listed stocks, but many of the most exciting opportunities in the sector are still in private hands. Elon Musk’s SpaceX, whose ultimate goal is to allow humans to live in space, is already valued at over $70 billion, for example.
Could investment trusts, which can invest in early-stage firms and unquoted companies, be the answer instead? The Silver-rated Scottish Mortgage Trust (SMT) bought into SpaceX in 2018, and the stock now makes up 1.2% of the portfolio. Scottish Mortgage is known for investing in disruptive companies at an early stage, such as Tesla. Indeed, gains of 700% in Tesla's share price helped Scottish Mortgage double investors' money last year, making it the best performing investment trust under Morningstar coverage. Tesla and SpaceX share the same founder, Elon Musk, whose vision (if not his ability to generate "emotion and noise") has been praised by Scottish Mortgage manager James Anderson. Other asset managers backing SpaceX include Fidelity and T Rowe Price, according to Pitchbook data.
A not-yet-launched investment trust also aims to tap into the space theme. Seraphim Space Investment Trust, whose chairman is former Virgin Galactic president Will Whitehorn, has just announced its intention to float and will be the first investment trust of its kind on the London market. The trust will initially hold 19 unquoted companies and target a total return of 20% a year from a global portfolio of early and growth stage space-focused businesses.
The Final Frontier?
Space may be the next frontier for many investors but it's worth bearing in mind that good stories don't always make good investments. Successful investment themes are typically underpinned by long-term structural changes and while space tourism is exciting for the super-rich, we're not likely to all be relocating to Mars in our lifetime.
Morningstar analyst Amy Arnott explains the perils of buying into The Next Big Thing: "The generally poor investor experience for people buying into thematic funds underscores a boring but wise lesson: investing isn’t supposed to be exciting. For most investors, it’s far safer to watch new developments from the sidelines and stick to broadly diversified equity funds.
