The exchange-traded fund (ETF) market experienced unusual multibillion-dollar flows in the past week, indicating that some major investors employed a controversial strategy to gain exposure to the initial public offering (IPO) of SpaceX. This practice led at least one fund manager to temporarily restrict their product to curb such activities. The primary theory among ETF specialists is that investors poured cash into ETFs that were expected to receive shares in the IPO, only to pull the money out once SpaceX's stock began trading publicly. This maneuver offered synthetic exposure and aimed to profit from any post-listing gains, though it carries risks of distorting fund performance and disadvantaging long-term holders.
Cathie Wood's ARK Innovation ETF (ARKK), valued at $6.9 billion, was significantly impacted. It recorded a record $4.6 billion inflow late last week, followed by its largest-ever outflow of $6.2 billion in the subsequent session. This activity coincided with ARKK acquiring approximately 1.7 million shares of SpaceX on the day the rocket maker debuted on the market. Similar patterns have been observed in other IPOs over the past year and were also noted in two other Ark Investment Management products, as well as the Baron First Principles ETF (RONB) from Baron Capital. Baron's RONB saw inflows of about $1.6 billion over the last six weeks, with roughly $1.5 billion subsequently pulled out in the last two available trading sessions.
This expansion of the practice highlights the intense competition for access to major IPOs, especially for high-profile listings like SpaceX, which was anticipated to be the largest in history. It also raises concerns about potential tax avoidance. In response to this trend, Joel Shulman, founder and chief investment officer of ERShares, implemented restrictions on primary creations and imposed a 2% redemption fee for the $2.4 billion ERShares Private-Public Crossover ETF (XOVR) before the SpaceX offering, as investors in XOVR already had indirect exposure to SpaceX prior to its public debut. ARKK has experienced similar large inflow and outflow patterns during the recent IPOs of X-Energy Inc. in April and Cerebras Systems Inc. in May.
