ETF Pulse Check Navigating the Horizon Kinetics SPAC Active ETF amid Market Volatility

The Horizon Kinetics SPAC Active ETF, trading under the code SPAQ, is an actively managed financial instrument designed to provide exposure to globally listed, pre-combination special purpose acquisition companies (SPACs) of any capitalization. This ETF is particularly relevant in the current market climate as it aims to achieve realized capital gains over short-term interest rates on a risk-adjusted basis. By investing in SPACs and related securities, SPAQ seeks to capitalize on the potential upside when a favorable combination announcement is made. The fund also offers an exit strategy through redemption options. Amidst macroeconomic uncertainties, SPAQ provides a compelling asymmetric risk and reward profile, making it an intriguing option for investors seeking exposure to this niche market segment. However, the ETF's significant exposure to financials and its ability to temporarily invest up to 100% of its assets in US short-term debt securities and money market instruments highlight its strategy to navigate volatile market conditions.

Basic Information
The Horizon Kinetics SPAC Active ETF, abbreviated as SPAQ, was issued by Horizon Kinetics on January 27th, 2023. The ETF carries an expense ratio of 0.85%, reflecting the costs associated with its active management strategy. The top 15 holdings of the ETF, including Axiom Intelligence (AXIN) at 4.98% and Centurion (ALF) at 4.72%, contribute to a diversified portfolio, albeit with a notable concentration in the financial sector, which constitutes 42.75% of the ETF's exposure. This is followed by the industrials sector at 9.09% and information technology at 8.9%. Despite the promising sector allocation, the 7-day and 30-day net flow ratios of 0.00% and -1.04%, respectively, indicate a net outflow over the short term. The ETF's average returns over 6 months, 1 year, and 3 years stand at 4.27%, 3.29%, and 2.70%, respectively, with associated volatilities of 1.87%, 1.96%, and 1.82%, suggesting a stable but modest performance. Additionally, the maximum return drawdowns of 0.009563% over 1 year and 0.195686019% over 3 years reflect the ETF's exposure to market fluctuations.

News Summary
The macroeconomic landscape poses several challenges to the Horizon Kinetics SPAC Active ETF. Geopolitical tensions, particularly between the US and its trade partners, could significantly impact SPACs, especially those focusing on technology-related acquisitions, due to President Trump's threats of new tariffs and export restrictions. Such geopolitical risks could increase market volatility and affect investor sentiment, influencing the ETF's performance. Additionally, the potential removal of Federal Reserve Governor Lisa Cook and subsequent concerns about the Fed's independence may lead to interest rate fluctuations, impacting the cost of capital for SPACs. Persistent inflation worries and possible US interest rate cuts could further influence financial markets, affecting borrowing costs and investment strategies critical for SPACs. Furthermore, the US's trade policies, particularly those impacting the automotive sector, could ripple through to SPACs with exposure in manufacturing and automotive industries. The evolving US-China relations add another layer of complexity, as SPACs targeting Chinese markets or tech sectors face heightened regulatory scrutiny. These macroeconomic factors collectively underscore the vulnerabilities the ETF may encounter.

Analyst Rating: Sell
The Horizon Kinetics SPAC Active ETF faces multiple challenges across key evaluation dimensions. The ETF's expense ratio of 0.85% represents a substantial cost to investors, which, combined with a 30-day net outflow ratio of -1.04%, suggests potential investor dissatisfaction. While the ETF exhibits strong return stability with low volatility, its modest average returns over 6 months, 1 year, and 3 years indicate underwhelming growth compared to industry benchmarks. Additionally, the concentration risk, with 42.75% exposure in the financial sector, exposes investors to sector-specific risks. Despite strengths in premium stability and return stability, the high cost, negative capital flows, and low return performance lead to a Sell rating for this ETF.

Backtest Scenario
A backtest of the Horizon Kinetics SPAC Active ETF during the March 2023 banking turmoil was conducted to evaluate its resilience amidst financial sector volatility. The ETF demonstrated a relatively stable performance, experiencing a slight decline of -0.26% on March 27, 2023, followed by a recovery of 0.38% on March 30, 2023. This performance indicates some level of resilience in financial sector volatility, though fluctuations were still present.

Risk Outlook
The Horizon Kinetics SPAC Active ETF is navigating a complex risk environment shaped by both macroeconomic and sector-specific factors. The ETF's significant exposure to financials suggests susceptibility to interest rate policy changes and monetary conditions. Concerns regarding the potential removal of Federal Reserve Governor Lisa Cook could lead to increased market volatility and interest rate shifts, impacting the cost of capital and valuations for SPACs. Geopolitical tensions, particularly those related to US trade policies and US-China relations, could further exacerbate risks for SPACs targeting international markets. The moderate concentration in top holdings provides some diversification, though the overall sector concentration remains critical. While the ETF shows low return volatility, indicating muted market risk, the negative 30-day net flow ratio highlights potential liquidity concerns amid macroeconomic pressures. Persistent inflation and potential interest rate cuts may alter borrowing conditions, presenting forward-looking risks for SPAC-led mergers and acquisitions. Exposure to industrials and information technology sectors amid geopolitical uncertainties could introduce additional volatility.

Conclusion
The Horizon Kinetics SPAC Active ETF offers a unique investment opportunity with its focus on SPACs and related securities. However, its suitability aligns more with aggressive investors due to the inherent risks and sector concentrations. Investors should closely monitor geopolitical developments, interest rate policies, and macroeconomic indicators that could impact the ETF's performance in the future.