Space ETFs Sink as SpaceX IPO Hype Fades

Returns on space and aerospace exchange-traded funds that drew heavy inflows on expectations for a SpaceX listing have tumbled across the board. The slide comes as shares of privately led commercial space companies, often grouped under the "New Space" label, have weakened recently. Some investors are also warning that volatility could climb further if money rushes into the sector after SpaceX goes public in June.

According to the Korea Exchange on April 28, six of the 10 worst-performing ETFs in the week from April 21 to April 27 were space and aerospace-themed products. The biggest drop came from ACE U.S. Space Tech Active, which fell 9.83% during the period. Other major products also lost 7% to 9%, including KODEX U.S. Space Aerospace, down 8.34%, and SOL U.S. Space Aerospace Top 10, off 8.33%.

The weakness was driven largely by declines in New Space stocks held heavily in these portfolios. AST SpaceMobile, a major holding in most of the ETFs, fell more than 6% over the past five trading days after news that its BlueBird 7 satellite failed to reach orbit. EchoStar and Firefly also posted double-digit declines, dragging on fund returns.

Competition among asset managers to launch rival products has also added to volatility risk. Later entrants raised the weighting of "pure-play space companies" with market capitalizations of 1 trillion won to 2 trillion won ($696 million to $1.39 billion) to differentiate their offerings, increasing price swings. "The space industry is still at an early stage, so even a single event can sharply shake stock prices in this high-volatility market," an asset-management industry official said. ETFs with larger allocations to small- and mid-cap stocks may expose investors to bigger swings, the person added.

The upcoming SpaceX listing is another potential headwind for existing theme stocks. Funds would need to sell large amounts of smaller stocks already in their portfolios to add SpaceX. That selling pressure could weigh on small- and mid-cap share prices.

The strategy of adding SpaceX immediately after its listing also has clear limits. South Korean asset managers are unlikely to win generous allocations of IPO shares ahead of large institutional investors in the local market. That means they will probably have to buy in the secondary market after an initial jump, leaving funds vulnerable to a sharp drop if the stock later pulls back.

SpaceX also faces a large overhang risk from potential selling. The underwriting side is reportedly discussing a plan to sell early investors' stakes in stages. Even then, post-listing profit-taking could continue to flow into the market and put downward pressure on the stock. That could amplify return volatility for ETFs that buy SpaceX at elevated prices soon after the debut.

Yang Ji-yoon, Hankyung.com reporter yang@hankyung.com