Regulators Bar Passive ETFs From Joining SpaceX IPO, Giving Active Funds Early Edge

South Korean asset managers are taking divergent paths ahead of a planned SpaceX listing after financial regulators effectively barred passive exchange-traded funds from participating in the initial public offering. The guidance gives active ETFs a chance to buy at the offering stage and capture any early gains after the debut, while passive funds will have to wait until trading begins.

According to the financial investment industry on June 9, regulators recently told asset managers during a regulatory interpretation process that passive ETFs would face difficulty joining the SpaceX IPO. The position appears to reflect concerns that buying IPO shares before the stock is added to an index could create tracking error for index-following funds.

Korea Investment Management is the only firm to officially disclose plans to participate in the SpaceX IPO. It plans to receive an institutional allocation and add the shares to products including the ACE US Space Tech Active ETF. Because the fund uses an active strategy, its manager has relatively broad discretion to add or remove holdings, unlike passive ETFs. The size of any IPO allocation has not been determined. Korea Investment Management plans to submit subscription orders for the maximum possible amount and then, if needed, buy shares in the market to raise SpaceX to as much as 25% of the portfolio.

Competing space and aerospace ETFs run by Samsung Asset Management, Mirae Asset Global Investments and Shinhan Asset Management are mostly passive products. Those ETFs are structured so that SpaceX can be added to their indexes on an ad hoc basis within one to two business days of listing, with a weighting of as much as 25%.

Industry participants say the regulator's stance puts passive ETFs at a disadvantage because only active funds can buy at the IPO stage. IPO stocks often jump sharply above the offer price on their first trading day. In the case of a blockbuster listing such as SpaceX, whose valuation is estimated at about $2 trillion, early returns could materially affect ETF performance.

The policy has also drawn complaints from parts of the asset-management industry. Some argue that because SpaceX is set to be added to indexes immediately after listing, allowing passive ETFs to join the IPO would have limited market impact. "Even if a passive ETF participates in the IPO, the resulting tracking error is effectively limited to about one day," one industry official said. "It could instead reduce the market impact of large-scale buying immediately after the listing." Others are more cautious. Another industry official said participation in the IPO does not necessarily guarantee excess returns, given the likelihood of sharp volatility after trading begins.

Meanwhile, rising expectations for a SpaceX listing are drawing heavy inflows into US space and aerospace-themed ETFs in South Korea. Over the past month, retail investors were net buyers of 1.4614 trillion won ($1.06 billion) of the TIGER US Space Tech ETF. Over the same period, the KODEX US Space Aerospace ETF recorded net inflows of 124.2 billion won ($89.9 million), the ACE US Space Tech Active ETF drew 59.4 billion won ($43.0 million), and the SOL US Space Aerospace TOP10 ETF attracted 49.2 billion won ($35.7 million).

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