What to expect from Ark Invest's coming 'ARKX' ETF, which ignited a rally for pure-play space stocks

Published Sun, Jan 17 20217:45 AM EST

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

Cathie Wood's Ark Invest is preparing to launch a space exploration ETF , under the ticker ARKX, and speculative trading around the sector's limited number of pure-play public companies revealed which stocks investors expect will be included. ARKX, like Ark Invest's seven other ETFs, will be actively-managed. Analysts expect it will consist of around 50 U.S. and international stocks, and will include a broad range of market values. Ark now has more than $40 billion in assets under management with Wood's firm coming off a wildly successful 2020. Ark will look to tap into the $420 billion space economy, which continued the past decade's investing momentum despite the COVID-19 pandemic. "An ETF from such a large issuer could drive substantial money directly into space and satellite names, and also bring greater investor attention to the industry," Raymond James analyst Ric Prentiss wrote in a note to investors. The announcement that ARKX is coming to market had a swift impact on the sector, Quilty Analytics founder and president Chris Quilty, told CNBC, which he said was "brutally demonstrated" on Thursday due to the "insufficient market cap" in the sector. Shares of pure-play space companies rallied the day after an Ark securities filing about the ETF was made public — as well as the stocks of two SPACs, or special purpose acquisition vehicles, which are looking to take space companies public. On the day, Maxar Technologies and Virgin Galactic each surged 20%; Loral Space rose 14%; ORBCOMM , Globalstar and Gilat climbed 10%, EchoStar was up 10%; Viasat rose 9%; and Iridium climbed 9%. SPAC's Stable Road — which intends to acquire Momentus — and New Providence — which intends to acquire AST & Science — rose 26% and 8%, respectively. "The clear issue is that there are a limited number of investable options from a pure revenue perspective, and the largest players in the space industry are the defense primes — but for those companies space is a very small part of what they do," Quilty said, adding that Wall Street has not covered the sector that aggressively yet because there hasn't been an incentive to do so. "At this point, most investment firms out there can't justify dedicated resources on the sector because they can't make enough money on the trading desk or from banking to justify the use of those analysts' time," he said. SpaceX private, but options available Wood's Ark Invest is known for targeting companies with disruptive growth, but J.P. Morgan analyst Seth Seifman explained to investors that Elon Musk's SpaceX and Jeff Bezos' Blue Origin, "the most disruptive space companies," are private. Quilty agreed, similarly highlighting SpaceX as "the shadow in the background of all of this" and "the most exciting, attractive company in this sector." But that didn't stop investors from rushing to other pure-play names, including pre-revenue companies like Virgin Galactic, Momentus and AST & Science. And Quilty highlighted Maxar as a stock that had a considerable number of short-sellers betting against it, with almost 15% of its shares sold sort, but surged anyway. Those investors "got stuck on the wrong side of an ETF selection," Quilty said. The rally even sent a rival ETF offering, the UFO fund offered by ProcureAM since April 2019 , up 6% on Thursday. "Usually you'd think: 'Well, there goes that, time to find a new angle.' But sure enough, the exact opposite is happening," ProcureAM co-founder and CEO Andrew Chanin told CNBC. "I think a lot of people are really excited because of Cathie Wood's track record," Chanin added. "And it's beneficial not just for us, but also in our pursuit of educating the broader population and investing population about the importance of the space industry." He also noted that, given the pre-revenue nature of some available space stocks, ETFs provide diversification to protect investors. "It's a really great tool to be able to manage some of the risks that you might be taking on," Chanin said. Chanin noted that, given Ark's focus on disruptive companies, the ARKX fund may feature some unique selection such as Amazon , which is working on a $10 billion satellite internet network called Kuiper that will compete with SpaceX's Starlink. More space stocks expected to debut in 2021 Several space companies are poised to go public this year, such as the two SPACs announced so far and holding company Voyager eyeing the traditional IPO route . "It looks like there should be a strong space pipeline for 2021 already from IPOs and some of these SPACs," Chanin said. Analysts believe the timing of Ark's new ETF is likely based on the expectation that more pure-play options will come to the market. Quilty emphasized that he doesn't have any inside knowledge on what other companies may go public, but highlighted satellite builders Planet Labs and Spire Global as two startups who have had "years to mature their business model to arguably be in a place where they could go public." "Suddenly people are realizing there's a huge market for this. If I'm a private equity firm, I would start rolling up companies and taking them public and that's already happening. If you're a blank check company, and you're trying to figure out what to buy, well then I'm going to go find me another space company to go after," Quilty said. "There's now a huge market for taking space companies public." – CNBC's Michael Bloom contributed to this report. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

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