Special-purpose acquisition companies (SPACs) have surpassed traditional initial public offerings (IPOs) in volume this year and some have hailed them as a new asset class that all investors should consider adding to their portfolios. For what purpose? Supposedly they generate superior returns and may also offer diversification benefits relative to other forms of equity.
But are these diversification benefits real or illusory? To find out, we conducted an analysis of the full sample of SPACs that listed starting in November 2020.
SPACs are securities through which investors can aggregate their money in blank-check funds that sit and wait to identify target companies to purchase and take public. This period when the SPAC is assessing potential targets is called its “pre-deal” phase. After a company is targeted and purchased and thus taken public, the “post-deal” phase of the SPAC commences.
To study the SPAC effect on a portfolio, we collected data on all SPACs that have listed since November 2020 and selected the CNBC SPAC 50 to serve as the index representing our diversified portfolio of SPACs. The CNBC SPAC 50 tracks the 50 largest US-based pre-merger blank-check deals by market cap.
For the post-deal phase of the SPAC, we used the CNBC post-deal SPAC 50, which is composed of SPACs that have found a target and gone public.
So how have SPACs fared pre- and post-deal and against the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite, the Russell 2000, and the tech exchange-traded fund (ETF) SPDR XLK?
Between 30 November 2020 and 1 April 2021, the SPAC 50 pre-deal underperformed the SPAC 50 post-deal 12.15% to 17.61%, or by about 5 percentage points.
SPACs vs. The Major Indexes, 30 Nov. 2020 to 1 April 2021
| Return | Volatility | |
| SPAC 50 Pre-Deal | 12.15% | 26.52% |
| SPAC 50 Post-Deal | 17.61% | 44.31% |
| S&P 500 | 11.00% | 14.30% |
| Dow | 11.86% | 12.33% |
| NASDAQ | 10.50% | 21.50% |
| Russell 2000 | 23.85% | 25.16% |
| XLK | 10.21% | 22.13% |
Volatility
Both SPAC indexes exhibited more volatility than all the other major indexes. The volatility and performance variability is reflected in the individual SPACs within these indexes.
Among the returns of the post-deal SPACs, there is considerable dispersion. The bottom quartile of fund performance averaged -30%, while the top quartile averaged 81%.
Diversification
But what about SPACs’ diversification benefits? How do the SPAC 50 indexes correlate with all the major equity indexes?
Pre-deal SPACs average a correlation coefficient of 0.43 with the big stock indexes. But once SPACs go public, the correlation coefficient shoots up to 0.53. This suggests that SPACs may offer some diversification benefits in the pre-deal phase, but those benefits erode significantly after the deal is executed.
SPAC performance correlated with some indexes more than others. In the pre-deal phase, SPACs were most correlated with the NASDAQ Composite, with a correlation coefficient of 0.50. Post-deal SPACs, on the other hand, tended to follow the Russell 2000 with a correlation coefficient of 0.66.
SPAC 50: Pre-Deal Correlation
| S&P 500 | 0.44 |
| Dow | 0.33 |
| NASDAQ | 0.50 |
| Russell 2000 | 0.45 |
| XLK | 0.43 |
The SPAC 50: Post-Deal Correlation
| S&P 500 | 0.49 |
| Dow | 0.37 |
| NASDAQ | 0.61 |
| Russell 2000 | 0.66 |
| XLK | 0.52 |
These correlation coefficients are pretty high across the board. Indeed, they are much higher than those between equity and bond indexes over the same time period. The SPAC 50 Index had a 0.068 correlation with the Vanguard Total Bond Index, compared to the 0.112 correlation the S&P 500 had with the bond index.
The claim that SPACs constitute an uncorrelated asset class relative to public equities is very much unsubstantiated. Even in their pre-deal phase, SPACs have a weak positive correlation with equities. This implies that they may offer some diversification benefits, but nowhere near those of the standard total bond index.
So if the goal is portfolio diversification, SPACs don’t look like the best option.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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