ETF Pulse Check Procure Space ETF UFO

The Procure Space ETF (UFO) offers investors a unique opportunity to engage with the global aerospace industry, tracking a tier-weighted index of companies that span various sectors related to space technology. As the first global aerospace and defense fund, UFO is particularly relevant in today's market, where advancements in satellite-based consumer products, rocket and satellite manufacturing, and space-based imagery are gaining momentum. The ETF is structured to emphasize non-diversified companies with substantial space-related revenues, providing 80% of the index weight, while diversified companies contributing to space technology receive the remaining 20%. With its semi-annual reconstitution and rebalancing, UFO remains adaptable to industry shifts, positioning itself as a significant player in the evolving aerospace sector.

Basic Information
The Procure Space ETF, designated as UFO, is issued by ProcureAM and has been available to investors since April 11, 2019. It carries an expense ratio of 0.94%, which is on the higher side, potentially impacting cost efficiency for investors. The top 15 holdings, led by Echostar at 7.37% and Rocket Lab at 6.13%, contribute to a considerable concentration in the fund, together accounting for 68.51% of its total assets. Sector exposure is notably focused on Communication Services, comprising 47.94% of the fund, followed by Industrials at 11.72%, Information Technology at 4.55%, and Consumer Discretionary at 4.3%. The recent 7-day and 30-day net flow ratios of 1.07% and 0.38%, respectively, suggest steady investor interest. However, the average returns over 6 months, 1 year, and 3 years are mixed, at 3.82%, 6.26%, and -5.42%, indicating variability in performance. Volatility remains a concern, with standard deviations reaching up to 13.60% over three years, although the maximum drawdowns are minimal at 1%, showing some resilience in downturns.

News Summary
Recent news within the communication services sector, which holds the largest exposure in UFO, reveals dynamic shifts and emerging trends. Morningstar's reports highlight the sector's ongoing developments, with companies like Netflix and Sirius XM Holdings receiving analyst attention for their strategic moves and market positions. Sirius XM's expansion efforts through satellite radio and streaming services underscore the relevance of communication within UFO's holdings. Additionally, macroeconomic factors such as rising inflation and geopolitical tensions, including tariffs on international trade, could pose challenges to the ETF's constituents, affecting their operational costs and market performance. The broader industry narrative indicates potential regulatory adjustments and technological advancements, such as AI and 5G, further influencing sector dynamics and investor sentiment.

Analyst Rating: Sell
The Procure Space ETF presents a complex investment profile with notable concerns. Its expense ratio of 0.94% is relatively high, impacting its cost competitiveness. Despite strong investor flows, as evidenced by a 7-day net flow ratio of 1.07%, the ETF's return performance is underwhelming, with average returns over three years in negative territory at -5.42%. Volatility remains moderate, yet the high sector concentration, particularly in Communication Services, poses risks if this sector faces downturns. Given these factors, the ETF's investment appeal is limited, resulting in a 'Sell' recommendation from analysts who favor more stable return profiles and lower expense ratios.

Backtest Scenario
The backtest of the Procure Space ETF during the COVID-19 pandemic's impact on the Communication Services sector from March 2020 reveals significant challenges. The ETF's stock price declined by approximately 30%, underperforming the sector average, which fell by 20%. This underperformance can be attributed to UFO's higher concentration in smaller-cap stocks, which exhibited greater volatility during market disruptions. The slower recovery of the space exploration industry, reliant on government contracts and international cooperation, further delayed the ETF's rebound compared to the broader sector. These insights emphasize the importance of diversification and resilience when investing in highly volatile industries.

Risk Outlook
The Procure Space ETF faces multiple forward-looking risks that could affect its future performance. A substantial concentration in Communication Services heightens exposure to sector-specific challenges, including regulatory changes and shifts in consumer demand. Rising U.S. inflation and geopolitical tensions present macroeconomic risks that could impact input costs and supply chains for key holdings like Viasat and Airbus. Additionally, potential adjustments in interest rate policies could increase borrowing costs for capital-intensive companies within the ETF. Although liquidity risk is currently muted, sudden changes in investor sentiment could disrupt this stability, necessitating close monitoring by analysts.

Conclusion
The Procure Space ETF offers a distinctive investment opportunity for aggressive investors seeking exposure to the aerospace and communication sectors. However, its high expense ratio and weak historical returns warrant caution. Investors should closely monitor macroeconomic developments and sector dynamics to navigate the potential risks associated with this ETF.