Deep Dive: Adventurous investors can take a rocket ride with this new space ETF

Mutual Funds

How often do you wish you could go back in time and make what now appears to be an “obvious” investment in a transformational company or industry? It seems perfectly clear now that smartphones would become ubiquitous and allow Apple to become the world’s most valuable publicly traded company. You might say the same thing about cloud computing or internet retail, which made early and dedicated Amazon.com shareholders a lot of money.

Try looking up for the next theme: into space and the satellites orbiting there.

Now there is an exchange-traded fund that focuses on space — not merely on aerospace and defense contractors. The Procure Space ETF
US:UFO,
launched in April, invests in companies around the world that are profiting from space now, as opposed to human space flight, which remains, for the most part, experimental. The fund is still tiny, with only $12.5 million in assets, and has an expense ratio of 0.75%.

So space enthusiasts have something to celebrate. Then again there’s no way of knowing whether an ETF focused on space will perform better than a broad index fund.There’s also no way to predict what long-term technological developments might disrupt the slew of satellite operators and service providers held by the ETF. Since UFO was established on April 11, it has returned 5.6%, trailing the S&P 500 index
US:SPX,
which has returned 7.6%.

Here’s the big-picture investment case: The global space industry’s revenue totaled nearly $415 billion in 2018 according to an estimate by the Space Foundation, a nonprofit advocacy and education group. Analysts at Bank of America Merrill Lynch have predicted that could balloon to a $2.7 trillion industry by 2045 amid more space startups and as more countries launch satellites and the cost of those launches decline. That would make for a compounded annual growth rate of just over 7%.

In an interview ProcureAM CEO Andrew Chanin described the ETF’s strategy and discussed some of its holdings, including Richard Branson’s Virgin Galactic Holdings
US:SPCE.
The fund bought shares of Virgin Galactic (which doesn’t expect to turn a profit until 2021) on Oct 30, following the listing on the New York Stock Exchange on Oct 28. The position makes up less than 2% of the portfolio.

Chanin called Virgin Galactic’s space tourism concept “interesting” and said he expected the company’s technology eventually to be “repurposed for point-to-point hypersonic travel” Looking beyond the company’s current business model — taking passengers for suborbital sightseeing trips for $250,000 a pop — Chanin envisions quick trips from New York to Australia, for example.

Read:As Virgin Galactic shares debut, here are the billionaires leading the new space race

UFO is the first ETF with the word “space” in its name The is not simply a marketing gimmick because the fund focuses on pure-play companies. It isn’t yet another aerospace and defense ETF holding major contractors, the largest of which is the $5.5 billion ishares U.S. Aerospace & Defense ETF
US:ITA,
which has 21% of its money in Boeing
US:BA.

AT UFO, Boeing comprises just 25% of the holdings. Instead, 80% of the fund’s portfolio comprises companies that derive at least 50% (and usually much more) of their revenue from space-related activities.

The other 20% is invested in conglomerates such as Lockheed Martin
US:LMT,
Raytheon
US:RTN
Airbus
FR:AIR
and of course Boeing. These companies draw small percentages of total revenue from space but still take in “billions of dollars” of related revenue, according to Micah Walter-Range, the founder of Space Investment Services.

Space Investment Services developed the S-Network Space Index, which is licensed by UFO. (UFO invests at least 80% of its portfolio in components of the index.)

Space has been recapturing the public’s imagination. President Trump has called space crucial to the nation’s military defense and has created a united Space Command within the military. SpaceX, led by Elon Musk (who is also CEO of Tesla
US:TSLA
) has become an efficient government contractor for rocket launches, while it and competitor Blue Origin (led by Amazon.com
US:AMZN
founder Jeff Bezos) are developing manned spacecraft and mission plans for Mars and the Moon.

Neither of those companies, however, is likely to be taken public soon, according to statements made by their founders. And you cannot invest in them indirectly — neither Tesla nor Amazon directly support their founders’ space companies.

Pure-play space now

But there are plenty of opportunities to make money with investments in publicly traded companies. Almost all of the 10 largest holdings of the UFO are companies that own or operate satellites, or use them for broadcasting. There’s one exception: Garmin
US:GRMN,
which makes GPS equipment. You can see the entire list of holdings for the ETF below.

“Satellites are one of the big differentiators” for the Procure Space ETF when compared to aerospace and defense funds Chanin said, because that’s where the growth is now. He expects satellites to play a greater role in integrated communications, especially with the rollout of 5G. For international calls, satellites “are already doing a ton,” he said.

The common thread for potential exponential growth in the satellite communications industry is “an insane amount of data being created. We are talking about multitudes of what we have now being the future standard,” he said.

The index

One goal of the S-Network Space Index index was for it to be tracked by an ETF so stock-trading liquidity was a very important consideration. This and a set of financial screens have limited the index to its current set of 32 out of hundreds of publicly traded companies.

Another goal was to make the index as much of a “pure play” on space as possible which meant focusing on the commercial side: satellite-driven broadcasting, GPS and GPS-like systems.

For example both the index and ETF include Dish Network
US:DISH
and AT&T
US:T,
which acquired satellite-TV provider DirecTV for $49 billion in 2015 and has since seen that business shrink.

For GPS Walter-Range said most investment gains in the satellite space come from equipment manufactures. He pointed to Garmin and Trimble
US:TRMB,
another stock held by the Procure Space ETF
US:UFO.

When asked if it might be premature for an investor to focus on space-related industries, Walter-Range said annual growth for the industry has averaged about 6% “over time,” but “if you are talking six months to a year, you are probably not going to get rich quick”

Then again the increasing interest in space among venture-capital investors pushes some companies to move quickly

As for Virgin Galactic, Walter-Range said he was “cautiously optimistic because space is hard to do and it is hard to do profitably”

UFO’s holdings

Here are all 31 stocks held by the Procure Space ETF, with FactSet’s industry categories for the companies:

Company

Ticker

Type

Country

% of portfolio

SES SA FDR (Class A)

FR:SESG Specialty Telecommunications

Luxembourg

5.84%

Intelsat S.A.

US:I Wireless Telecommunications

Luxembourg

5.56%

Garmin Ltd.

US:GRMN Telecommunications Equipment

Switzerland

5.40%

Trimble Inc.

US:TRMB Telecommunications Equipment

United States

5.19%

Sirius XM Holdings Inc.

US:SIRI Broadcasting

United States

5.15%

Sky Perfect JSAT Holdings Inc.

JP:9412 Broadcasting

Japan

4.97%

Loral Space & Communications Inc.

US:LORL Cable/Satellite TV

United States

4.92%

Eutelsat Communications SA

FR:ETL Broadcasting

France

4.87%

EchoStar Corp. Class A

US:SATS Telecommunications Equipment

United States

4.84%

Inmarsat PLC

UK:ISAT Wireless Telecommunications

United Kingdom

4.80%

Dish Network Corp. Class A

US:DISH Cable/Satellite TV

United States

4.77%

Iridium Communications Inc.

US:IRDM Wireless Telecommunications

United States

4.64%

Maxar Technologies Inc.

CA:MAXR Telecommunications Equipment

United States

4.55%

ViaSat Inc.

US:VSAT Telecommunications Equipment

United States

4.07%

Globalstar Inc.

US:GSAT Wireless Telecommunications

United States

4.03%

Orbcomm

US:ORBC Wireless Telecommunications

United States

3.86%

AT&T Inc.

US:T Major Telecommunications

United States

2.48%

Lockheed Martin Corp.

US:LMT Aerospace & Defense

United States

2.40%

Boeing Company

US:BA Aerospace & Defense

United States

2.31%

Comcast Corp. Class A

US:CMCSA Cable/Satellite TV

United States

2.29%

Northrop Grumman Corp.

US:NOC Aerospace & Defense

United States

2.29%

L3Harris Technologies Inc

US:LHX Aerospace & Defense

United States

2.26%

Raytheon Company

US:RTN Aerospace & Defense

United States

1.90%

Virgin Galactic Holdings Inc

US:SPCE Aerospace & Defense

United States

1.83%

Airbus SE

FR:AIR Aerospace & Defense

Netherlands

1.56%

Honeywell International Inc.

US:HON Industrial Conglomerates

United States

1.04%

Global Eagle Entertainment Inc.

US:ENT Specialty Telecommunications

United States

0.73%

Ball Corp.

US:BLL Containers/Packaging

United States

0.53%

Aerojet Rocketdyne Holdings Inc.

US:AJRD Aerospace & Defense

United States

0.35%

Thales SA

FR:HO Aerospace & Defense

France

0.30%

Leonardo SpA

IT:LDO Aerospace & Defense

Italy

0.12%

Source: FactSet

You can click the tickers for more about each company.

Here are total returns (including reinvested dividends) through Nov. 4:

Company

Ticker

Total return – 2019

Total Return – 3 Years

Total Return – 5 Years

Total Return – 10 Years

SES SA FDR (Class A)

FR:SESG 8%

-2%

-19%

74%

Intelsat S.A.

US:I 21%

926%

38%

N/A

Garmin Ltd.

US:GRMN 52%

122%

105%

434%

Trimble Inc.

US:TRMB 25%

59%

51%

278%

Sirius XM Holdings Inc.

US:SIRI 19%

67%

99%

1054%

Sky Perfect JSAT Holdings Inc.

JP:9412 -1%

2%

-23%

45%

Loral Space & Communications Inc.

US:LORL 8%

10%

-48%

192%

Eutelsat Communications SA

FR:ETL -2%

12%

-13%

26%

EchoStar Corp. Class A

US:SATS 33%

7%

6%

161%

Inmarsat PLC

UK:ISAT 48%

-20%

-2%

43%

Dish Network Corp. Class A

US:DISH 40%

-36%

-45%

145%

Iridium Communications Inc.

US:IRDM 38%

219%

146%

188%

Maxar Technologies Inc.

CA:MAXR -20%

-80%

-83%

-58%

ViaSat Inc.

US:VSAT 14%

-3%

9%

130%

Globalstar Inc.

US:GSAT -38%

-52%

-84%

-46%

Orbcomm

US:ORBC -47%

-43%

-30%

88%

AT&T Inc.

US:T 45%

26%

47%

164%

Lockheed Martin Corp.

US:LMT 46%

71%

125%

643%

Boeing Company

US:BA 11%

170%

217%

828%

Comcast Corp. Class A

US:CMCSA 31%

53%

76%

652%

Northrop Grumman Corp.

US:NOC 41%

58%

167%

838%

L3Harris Technologies Inc

US:LHX 46%

118%

206%

467%

Raytheon Company

US:RTN 42%

71%

126%

503%

Virgin Galactic Holdings Inc

US:SPCE -6%

N/A

N/A

N/A

Airbus SE

FR:AIR 58%

165%

206%

1048%

Honeywell International Inc.

US:HON 38%

85%

120%

551%

Global Eagle Entertainment Inc.

US:ENT -72%

-92%

-95%

N/A

Ball Corp.

US:BLL 46%

79%

117%

495%

Aerojet Rocketdyne Holdings Inc.

US:AJRD 23%

168%

156%

478%

Thales SA

FR:HO -13%

10%

144%

222%

Leonardo SpA

IT:LDO 45%

9%

68%

7%

Source: FactSet

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