Deep Dive: As SpaceX sends Americans into orbit, investors can take this ETF to a new frontier

More on the mission:SpaceX set to launch U.S. astronauts into space

Many investors don’t take space seriously, despite watching technological developments lead to incredible growth for so many companies, and their shareholders, over the past several decades.

Analysts at Morgan Stanley expect the space industry’s annual global revenue to exceed $1 trillion a year by 2040, from the current estimate of about $350 billion.

The SPDR S&P Kensho Final Frontiers ETF ROKT, -0.55% “seeks to cover all aspects of what space exploration can be,” according to Matthew Bartolini, the head of SPDR Americas research at State Street Global Advisors.

In addition to investing in companies that produce spacecraft, launch vehicles, rockets, satellites, infrastructure and mission-support services, the ETF also invests in companies involved with deep-sea exploration.

An explanation of ROKT’s passive strategy is below. Here’s a list of all 24 of the ETF’s holdings as of the market close May 28:

Company Ticker Industry Share of portfolio Total return – 2020
Maxar Technologies Inc. MAXR, +1.96% Aerospace & Defense 7.0% -6%
Raytheon Technologies Corp. RTX, -4.08% Aerospace & Defense 6.8% -23%
Teledyne Technologies Inc. TDY, +1.13% Aerospace & Defense 6.1% 7%
Lockheed Martin Corp. LMT, -1.91% Aerospace & Defense 6.0% 3%
L3Harris Technologies Inc LHX, +1.38% Aerospace & Defense 5.7% 0%
Northrop Grumman Corp. NOC, -1.78% Aerospace & Defense 5.7% 0%
CACI International Inc Class A CACI, -0.01% Information Technology Services 5.5% 0%
Aerojet Rocketdyne Holdings Inc. AJRD, +0.36% Aerospace & Defense 5.2% -4%
Mercury Systems Inc. MRCY, +0.68% Electronic Equipment/Instruments 5.1% 28%
Heico Corp. HEI, -3.04% Aerospace & Defense 4.8% -9%
Ball Corp. BLL, +1.22% Containers/Packaging 4.4% 9%
BWX Technologies Inc. BWXT, -1.07% Electric Utilities 4.1% 3%
Analog Devices Inc. ADI, +1.79% Semiconductors 3.8% -6%
Jacobs Engineering Group Inc. J, -0.32% Engineering & Construction 3.8% -6%
Amphenol Corp. Class A APH, +1.26% Electronic Components 3.6% -12%
General Dynamics Corp. GD, -1.11% Aerospace & Defense 3.3% -15%
TransDigm Group Inc. TDG, -1.46% Aerospace & Defense 3.0% -23%
ESCO Technologies Inc. ESE, -0.64% Aerospace & Defense 2.9% -10%
TTM Technologies Inc. TTMI, -0.51% Electronic Components 2.6% -23%
Hexcel Corp. HXL, +1.68% Aerospace & Defense 2.6% -51%
Boeing Co. BA, -2.65% Aerospace & Defense 2.5% -54%
Moog Inc. Class A MOG.A, -2.60% Aerospace & Defense 2.0% -35%
TechnipFMC PLC FTI, -3.64% Oilfield Services/Equipment 1.6% -63%
Standex International Corp. SXI, -5.46% Miscellaneous Manufacturing 1.0% -29%
Ducommun Inc. DCO, -0.09% Aerospace & Defense 0.7% -36%
Source: FactSet

You can click on the tickers for more about each company.

Bartolini, in an interview, said some of the same technologies developed for deep-sea exploration will be used in asteroid mining and planetary exploration. He pointed to Department of Defense budgeting, where expects “specific carve-outs” for deep-sea exploration.

Stock selection

The SPDR S&P Kensho Final Frontiers ETF tracks the S&P Kensho Final Frontiers Index. Kensho was acquired by S&P Global Market Intelligence in 2018. Kensho created the natural-language algorithm that scans companies’ filings to identify which ones should be included in the index. The screening not only looks for key words, but also for their placement to make sure industry selections are appropriate.

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.

State Street Global Advisors

Bartolini explained that after the screening, the index is “built by overweighting the core companies,” such as Boeing Co. BA, -2.65% and Lockheed Martin Corp. LMT, -1.91%, “which are very much involved in space exploration.” The index, and the ETF, place a lower weighting on what Bartolini calls “ancillary plays” such as Ball Corp. BLL, +1.22%, which makes packages used for aeronautical food and beverages.

So the ETF’s portfolio is meant to be “expansive and exhaustive,” Bartolini said.

The fund is rebalanced twice a year, with core stocks making up 60% of the portfolio, equally weighted, while the remaining 40% is in the ancillary stocks, also equally weighted.

“There will be some drift due to market performance,” Bartolini said, pointing to Ball Corp.’s outperformance and the painful decline in Boeing’s shares.

He added that ROKT’s weighting approach might be better than traditional weighting by market capitalization, because it captures “the diversified space, while lowering concentration risk.”

Contrast with UFO

In November, I reviewed the Procure Space ETF UFO, -1.51% and was surprised to see it was heavily invested in the broadcasting, cable/satellite TV, telecommunications and telecom-equipment industries, which now make up 67% of that portfolio, according to FactSet. (You can read about UFO here.)

In contrast, 64% of the ROKT ETF comprises aerospace and defense companies, according to FactSet.

This isn’t to say one ETF is better than the other. After all, UFO is focused on businesses that use satellites in orbit. Then again, the use of satellites doesn’t necessarily mean you have a cutting-edge business. Dish Network’s DISH, +1.49% pay-TV subscribers were down 6% year-over-year through March 31.

Both ETFs are fairly new, with ROKT established in October 2018 and UFO in April 2019. ROKT fell 13% for 2020 through May 28, while UFO dropped 24.5%. In comparison, the S&P 500 Index SPX, +0.48% was down 6.2%.

ROKT doesn’t hold any stocks in the broadcasting, cable/satellite TV, telecommunications or telecom equipment industries.

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