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*VIVENDI: SET A MINIMUM TARGET OF EU30B FOR UMG’S ENT. VALUE

*VIVENDI: SET A MINIMUM TARGET OF EU30B FOR UMG’S ENT. VALUE

*VIVENDI: LISTING OF UMG SHARES WOULD BE APPLIED FOR IN EURONEXT

In an age of political division, plays like ‘Othello’ and ‘The Merchant of Venice’ offer lessons in understanding difference

The anger and unwillingness of many Americans to listen to those with different opinions is a serious societal problem. But the solution to this toxic state of things must begin on the level of the individual, with the way we listen and speak to relatives, neighbors and colleagues whose views may be diametrically opposed to our own. Lessons for modeling this kind of empathy can be found in literature—above all, in Shakespeare, whose plays are a great antidote to extremism and mean-spiritedness.

The renowned literary critic Harold Bloom asserted that Shakespeare “invented the human,” reflected in the rich interior lives of his characters. But it’s not just that Shakespeare’s characters are recognizably human; it is that the plays are constructed to make us more human. They elicit empathy for people whose backgrounds, situations and bodies are different from our own—characters we might otherwise dismiss, dislike or even abhor.

“The Merchant of Venice,” written in the late 1590s, was Shakespeare’s breakthrough play in this regard. The plot is principally taken from a 14th-century Italian tale, “Il Pecorone” (“The Simpleton”), about a young merchant who borrows money from a Jewish moneylender and offers a pound of his own flesh as security. But in that story the moneylender is an uninflected villain, while Shylock, the equivalent character in Shakespeare’s play, is given psychological depth and pathos. “Hath not a Jew eyes? Hath not a Jew hands, organs, dimensions, senses, affections, passions?” Shylock demands with poignant insistence. He explains that he has been made a villain by the Christian society that mistreats him: “The villainy you teach me, I will execute, and it shall go hard but I will better the instruction.”

In “Othello,” Shakespeare extends the same idea into a new context. Othello is a Moorish general in the Venetian army who wins the love of a Venetian noblewoman, Desdemona, with his martial exploits. But Iago, a junior officer, preys on Othello’s insecurity as a Black man in a white society, insinuating that Desdemona’s decision to marry him is “unnatural” in light of her “clime, complexion, and degree.”

What is often missed in this play is how much the scheming, villainous Iago is also a target of prejudice. The English poet Samuel Taylor Coleridge famously referred to Iago as being driven by “motiveless malignity,” but Shakespeare offers clues that the character’s malevolence is generated by a deep sense of grievance. Iago, a coarse, lower-class soldier, never has a speech like Shylock’s “Hath not a Jew eyes,” but he explains bitterly in the play’s first scene that he is deeply resentful at having been unfairly passed over for promotion: “’Tis the curse of service,/ Preferment goes by letter and affection, /And not by old gradation.” The man promoted in his place is the inexperienced but more refined Cassio, whom Iago convinces Othello is having an affair with Desdemona.

Othello becomes a murderer because he believes that, as a Black man, his wife cannot love him the way she would someone of her own background. Iago becomes a villain because, as a man without polish or pedigree, he believes he has been disrespected and overlooked: “I know my price, I am worth no worse a place,” he declares. Today, we understand the racial injustice that lies behind Othello’s fate but are likelier to remain blind to the class prejudice that instigates Iago’s behavior.

It’s also worth noting that “Othello” pays attention to the way women can be marginalized, their humanity overlooked. Iago’s wife Emilia has a speech that echoes Shylock’s poignant one: “Let husbands know/Their wives have sense like them: they see, and smell,/And have their palates both for sweet and sour/As husbands have.” In the end, Emilia is another of Iago’s victims, stabbed to death after she reveals her husband’s trickery.

A different kind of marginality is represented in “King Lear,” the monumental tragedy written around 1605, at the height of Shakespeare’s powers. Lear begins the play faced with the diminishment that comes with age, announcing that he will step aside and divide his kingdom among his three daughters. But he is unwilling to accept the loss of power, and this fuels his tyrannical rage at his daughter Cordelia, who—unlike her treacherous sisters—will not flatter her father by telling him what he wants to hear. In the end, Lear and Cordelia both pay with their lives for his lack of self-knowledge.

Lear’s case applies to us all: We are destined to lose power and become marginal figures, if we live long enough. Shakespeare encapsulates this insight in the famous “Seven Ages of Man” speech in “As You Like It,” which proceeds through comic representations of each stage of human life but turns to tragic pathos at the end: “Last scene of all/That ends this strange eventful history/Is second childishness, and mere oblivion,/Sans teeth, sans eyes, sans taste, sans everything.”

But Shakespeare’s empathetic imagination is perhaps most fully realized in the character of Caliban in “The Tempest,” the last play he wrote without a co-author, in 1610-11. Caliban is the native of the island occupied by the magician Prospero and his daughter Miranda, and he seeks to do them harm. But though Caliban is described as a monster, Shakespeare shows that he appreciates beauty and has a capacity for lyrical expression. Like Shylock, if he is a villain, it’s because he has been driven to it by persecution, as he tells Prospero: “You taught me language; and my profit on’t / Is, I know how to curse.”

What may be the most profound of all of Shakespeare’s revelations is that Caliban is not just a slave to Prospero but part of his essential nature. For all his knowledge and seeming beneficence, Prospero can be capricious, controlling and subject to fits of anger, giving resonance to his description of Caliban in the last act: “this thing of darkness/I acknowledge mine.”

The idea that otherness exists within us as well as outside of us gains power and complexity as we move through Shakespeare’s plays. His ability to probe the wellsprings of his characters’ actions, to see beyond the flat moral lessons of his sources, should be a guide for us as citizens. It is easy to react thoughtlessly to people who seem alien; it is much harder to see things from their point of view, to recognize what influences, in which we may be complicit, have formed or deformed their characters. That is the lesson that Shakespeare’s plays teach and that needs to be grasped today more than ever. When we address one another with empathy, disagreements don’t go away, but compromise and unity are easier to reach.

London’s sway in Europe put to test as rival hubs make trading inroads

Amsterdam, Paris and New York grab share but insiders say outcome is still uncertain

London’s once-unquestioned dominance of European financial markets is being tested as trading spills beyond the UK’s borders following the end of the Brexit transition.

Data released this week revealed the speed at which the UK can lose its grip on key parts of Europe’s financial services industry.

Trading in stocks and derivatives — markets where London has long taken a leading role — has flowed out of London in the six weeks since the Brexit transition period expired. Amsterdam, Paris and New York have all gobbled up market share, according to data released in recent days.

With financial services omitted from the UK’s trade deal with the EU just before Christmas, banks, brokers and fund managers have swiftly grown accustomed to far more basic and inefficient terms for cross-border trade.

Some executives and bankers worry that the patterns established in recent weeks are beginning to set the parameters for the relationship between London and Brussels over the longer term.

Steven Maijoor, outgoing chair of the European Securities and Markets Authority, said at a Financial Times conference this week that he suspected the share trading shifts were “going to be a permanent change”.

In one of the most symbolic changes in leadership to date, Amsterdam supplanted London last month as Europe’s main share trading hub, after dealing in EU companies moved back to the bloc.

So far in February there has been an average €8.7bn a day traded in the Dutch city, compared with €7.8bn on venues in London, CBOE Europe data show. Last year London traded an average of €17.6bn shares a day and Amsterdam languished behind Paris, Frankfurt and Zurich, with just €2.6bn.

Trading in euro-denominated swaps, a $1.6tn-a-day global market that was a City mainstay, also began leaving in the run-up to the UK’s departure from the single market as EU banks dealing derivatives in London were caught in a stand-off between London and Brussels over greater oversight of their activities.

New York has swept up the majority of business with $4tn of deals moving out of Europe to US marketplaces in the four weeks, according to Clarus FT, a data provider. Intercontinental Exchange said on Monday it will transfer the EU’s €1bn-a-day carbon emissions trading market from London to the Netherlands, although clearing will remain in the UK capital.

While the move in trading away from London has been rapid for some securities, many UK bankers and asset managers are sanguine.

“I’m not a ‘declinist’ about London’s future,” said Paul Marshall, a supporter of Brexit and co-founder of London-based Marshall Wace, one of the world’s biggest hedge funds.

“Irrespective of where trades are booked — and there is bound to be some shift due to the protectionist attitude of the EU — most of the money should continue to be managed from London,” he said. Sir Paul added he expected issues facing the City to be “looked after” by the government in due course.

The impact of Brexit on London’s large fund management and hedge fund industries has been muted so far.

While some managers have had to set up offices or use the services of a third-party company in the EU, very few have left the UK.

While Esma, one of the EU’s main financial watchdogs, has recommended tightening rules that allow UK managers to run EU-based funds, few executives see this as a major threat because such restrictions would also hit US and Japanese fund managers.

Bankers also said the move in trading would have only a subtle effect, at least initially, since modern day trading is mostly done on computers. “The euro share and derivative trading that has moved elsewhere is a tiny sliver of the global pie. Tiny. None of my people are moving to Amsterdam from London”, one bank executive in the UK said.

The trading moves “are significant but they are not the harbinger of doom for the City of London,” added William Wright, head of think-tank New Financial.

In most other areas of the City the effect is “not black and white”, he said. “I don’t think we can read too much from these two examples to the longer-term impact of Brexit on the City,” he added, referring to share and derivative trading.

For the UK, better terms of access to the vast single market relies on Brussels judging the UK’s regulation and supervision to be as good as its own, under a system known as equivalence. Granting a range of permits would make it far easier for brokers to conduct cross-border business and sell services to EU customers.

The City is holding out little hope that coming discussions on financial services between Brussels and London will yield much of substance. The two sides have committed to trying to find an accord by the end of March. Some firms have decided not to wait: investment bank Numis announced this week that it would open an EU office within 12 months.

Brussels is keen to assert its own financial independence from London and is wary of the extent of UK plans to deviate from EU laws. Andrew Bailey, governor of the Bank of England, weighed in this week, arguing that “now is not the time to have a regional argument.”

But the current flow of business to the EU may energise the bloc’s policymakers to extend their current stance. Leonard Ng, a partner at law firm Sidley Austin in London, said banks and fund managers may wait only a short period before moving on.

“If equivalence isn’t granted in the next three-six months, things will get settled and then banks won’t want to change back,” he said.

He added that the UK could strike out on its own path without equivalence. “But there’s no point in having better infrastructure if you don’t have clients,” he said.

Some bankers warn that the early shifts should not be underestimated over the longer-term. “The European Central Bank over time will insist on banks creating holding companies inside the EU, just as the US has done,” said the chief executive of one UK bank.

“One can imagine that in 10 years London will be a subsidiary of Paris, not the other way around. Banks will want to locate as much as they can of central costs in the holding company to take advantage of economies of scale. I am not being pessimistic, I am being realistic,” he said.

Federal Trade Commission opens in-depth review as Qualcomm and other customers signal concern

The US Federal Trade Commission has opened an in-depth review into Nvidia’s planned acquisition of the computer chip design group Arm from SoftBank, putting it at the forefront of what are expected to be a series of investigations around the world into a deal with broad ramifications across the technology industry.

The agency has sent requests for comment to companies that have already lodged complaints or might be affected by the deal, according to two people familiar with the move. European and UK regulators are gearing up for their own investigation, and executives involved in the deal also see China as a potential threat.

Qualcomm, the leading maker of mobile communications chips, is among the companies that have already signalled their unhappiness to regulators, according to a person familiar with the review. The deal has also stirred concern at many of Arm’s other customers in the five months since it was announced.

Arm’s designs for low-powered chips are used as the basis for the processors in most smartphones. Nvidia has said it wants to buy the company mainly to extend the use of its designs further into data centres, where the demands of artificial intelligence and cloud computing have led to a need for more energy-efficient processors.

That has potentially put Nvidia on a collision course with some of the biggest tech companies, which buy large volumes of data centre chips. Some, including Amazon, have also started to design their own Arm-based processors.

If it is allowed to buy Arm, Nvidia will be able to favour its own data centre chip business at the expense of other companies that also use Arm’s designs, according to an official at one company that has taken issue with the deal.

Another complained that Nvidia would get access to sensitive data about its competitors, since these companies share their future product plans with Arm in order to improve the company’s designs.

Nvidia declined to comment on whether it had been contacted by the FTC, but said it was “confident that both regulators and customers will see the benefits of our plan to continue Arm’s open licensing model and ensure a transparent, collaborative relationship with Arm’s licensees”.

Managers join CEOs of Reddit and Robinhood in committee hearing on stock market upheaval

Two of Wall Street’s leading hedge fund managers are set to testify along with the chief executives of Reddit and Robinhood at next week’s US congressional hearing on the market upheaval surrounding trading in GameStop shares.

The House of Representatives financial services committee announced the high-level roster of witnesses late on Friday. It includes Citadel’s Ken Griffin and Melvin Capital’s Gabe Plotkin, as well as Reddit’s Steve Huffman and Robinhood’s Vlad Tenev.

The committee added that Keith Gill, the trader known as “Roaring Kitty” who emerged as one of the key players in the GameStop rally that is attracting political scrutiny, would also appear.

The hearing, which will take place on Thursday in Washington, will be chaired by Maxine Waters, the veteran California Democrat and longtime critic of the financial services industry. The hearing’s title will be “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide”.

Congressional testimony by senior financial services executives is fairly common but it has been rarer for top hedge funds and private equity executives to be grilled on Capitol Hill.

Political attention of equities trading has increased sharply in recent weeks. This came after a rally in GameStop shares which was driven by retail investors who were active on the social media platform Reddit. They challenged hedge funds that were betting on the decline in the video game retailer’s shares.

When Robinhood, the online trading platform, halted trading in GameStop due to the volatility, it fuelled a backlash among retail investors that was joined by populist politicians from both the right and the left who said it offered evidence that the financial system was biased in favour of its largest players.

GameStop shares, whose value peaked at $347.51 on January 27, have since tumbled and closed at $52.40 on Friday. Even though trading in GameStop shares has stabilised, Washington’s legislators and regulators have moved to verify whether the episode was driven by market manipulation or other systemic problems in the financial system.

Last week Janet Yellen, the US Treasury secretary, convened a meeting of top regulators, including the Securities and Exchange Commission, and the Commodity Futures Trading Commission, saying the market’s “core infrastructure was resilient” but the SEC would release a “timely study” of the events.

In addition, the SEC and CFTC will be “reviewing whether trading practices are consistent with investor protection and fair and efficient markets”.

Like many energy companies, Royal Dutch Shell had a rough 2020. But that bad news is mainly in the rearview mirror, and now the stock looks significantly undervalued.

“If you distill it down, it’s the best international oil company in deep-water production,” says Jon Rigby, an oil-stock analyst at Swiss bank UBS.

Investors hoping to profit from the British-Dutch group’s likely stock appreciation should consider buying the London-listed shares (ticker: RDSA.London). Rigby sees the stock rallying over the next 12 months to 18.10 pounds sterling ($25), or 33% above its recent price of £13.61.

U.S.-based investors might turn to the American depositary receipts (RDS.A), recently trading at $38.52, which should see a similar percentage rally if the dollar/pound exchange rate remains stable. Investors would likely get an additional 3% dividend yield, and there is the potential for a boost via a stock buyback.

Rigby bases his price target on a reasonable oil-price forecast of $60 a barrel for Brent crude—about where it was recently. “If we can sustain $60 Brent, then Shell generates 10%-plus free cash flow versus market cap,” Rigby says.

The Covid-19 pandemic has hit major oil companies hard. Shell lost $21.7 billion last year, including a $4 billion loss in the fourth quarter, compared with profits of $15.8 billion in 2019.

As a consequence of the awful business conditions, shares in the $150 billion market-cap company took a beating over the past year, with the stock down 32% through Tuesday. Still, a lower share price hasn’t scared off analysts. The U.K.-based Share Centre says 23 of 34 analysts covering the stock rate it a Buy or a Strong Buy.

Wall Street is no doubt bullish because the company made tough decisions to cut costs last year. “We are coming out of 2020 with a stronger balance sheet,” CEO Ben van Beurden said in an earnings statement.

In 2020, Shell reduced operating expenses by 12%, or $4.5 billion, ahead of schedule, according to a recent Morningstar report.

A portion of the likely increasing profits should go straight to stock owners in the form of increased dividends and stock buybacks, once the company hits its debt target.

“Shell aims to return 20% to 30% of operating cash flow to shareholders once it reaches $65 billion net debt,” down from around $75 billion at the end of last year, the Morningstar report states. The debt reduction should come partly via asset sales and be completed around the middle of the year, Rigby says.

Some investors worry that the oil business is toast. While it is true that the auto industry is phasing out gasoline-powered vehicles, it could be decades before the transition is complete. “Combustion vehicles will be around for a long time,” says money manager Adam Johnson, founder of the Bullseye Brief financial newsletter.

In the meantime, Shell, like most other major oil companies, is well aware of the coming changes and has planned accordingly. The company said in January that it agreed to buy electric-vehicle charging company Ubitricity

Royal Dutch Shell to Buy EV Charging Company Ubitricity in Green Energy Push

The oil major has agreed to buy electric-vehicle charging company Ubitricity as part of its plan to become net zero on carbon by 2050.

Continue reading as part of its plan to become net zero on carbon by 2050. Ubitricity operates the largest public EV charging network in the U.K.—with about a 13% market share—and has growing networks in Germany and France.

Still, there are risks to investing in any oil stock, and that includes Shell. The energy business is notoriously subject to periodic booms when the price of oil peaks, followed by busts when it falls.

However, for those with a healthy risk appetite, Shell seems like a good bet for the near future.

Mark Mobius on Why Emerging Markets Will Outperform After Covid

Mobius, once described as the Indiana Jones of emerging markets, launched Mobius Capital Partners almost three years ago after retiring from a multidecade career at Franklin Templeton, where he ran one of the first emerging market funds. His new firm, which oversees $220 million in assets, takes a more concentrated approach to the frontier and emerging markets he has long invested in, focusing on roughly 30 companies and actively working to improve environmental, social, and corporate governance, or ESG, factors, and culture.

Barron’s caught up with Mobius in Dubai to see how he’s positioned for a global economic recovery, why he isn’t worried about a U.S.-China decoupling, and why he thinks central bankers’ fixation with inflation is misguided. An edited version of our conversation follows.

Barron’s: Emerging markets have lagged behind the S&P 500 index for about a decade. Why is this their year to outperform?

Mark Mobius: We’ve had a big run [in emerging market stocks], and this will continue. With the average age [of people] in these countries lower than that of the developed markets, their recovery [from Covid-19] will be faster. The vaccine, of course, helps, but more important is the psychology. As people begin to feel safe, you’ll see economic activity pick up very fast.

Technology is also hitting these markets, especially frontier markets, and that’s driving a lot of this move toward better asset quality and information. The currency is also getting stronger in emerging markets against the dollar, which itself is a positive. But more importantly, the psychology of a currency revaluation is very powerful for investors. The first question that [emerging market] investors often ask is if they will lose money on the currency.

India is the biggest country weighting in your portfolio. Why?

India just announced its budget and a number of dramatic changes that are going to have a big impact driving economic growth there—including opening up the insurance market to foreign investors and increasing privatization of state-owned enterprises. It’s a great story. We own APL Apollo Tubes [ticker: APAT.India], which makes steel pipes and [should benefit from] spending on infrastructure. We also own Persistent Systems [PSYS.India], a software company that does a lot of work with companies like IBM, and Metropolis Healthcare [METROHL.India], which does medical testing.

Latin America has been out of the spotlight. What are the opportunities there?

Brazil is the place we are focusing [on]. We own retailer Lojas Americanas [LAME4.Brazil], which has [an online retail] partner B2W Digital [BTOW3.Brazil] that is the equivalent of Amazon.com [AMZN]; a software company, Totvs [TOTS3.Brazil], and [medical diagnostics company] Fleury [FLRY3.Brasil]. With lockdowns, distance diagnosis is coming to the fore. Once these testing companies have your records, they can recommend hospitals, doctors, medicines. It’s a matter of data collection, which is very important.

Chinese stocks have had some of the biggest gains recently, but there are regulatory questions—Beijing scuttling the Ant Financial initial public offering, and new antimonopoly measures. What’s the risk?

The Chinese government realized you couldn’t have these internet companies taking over the financial system, which they were well on their way to doing. It’s why I believe they stopped the IPO. The government also was worried that retail investors might get burned because they were also planning to regulate these fintech companies. China’s not alone. The U.S. is looking at [regulation]; Europe is looking, too.

What do you think about recent efforts by the U.S. to restrict China’s access to technology?

The U.S. made a mistake restricting the transfer of technology. Now, if I were sitting in Beijing, I would say, “ Taiwan Semiconductor Manufacturing [TSM] is the biggest [chip company] in the world, and even though we consider it our province, we can’t control that. Samsung Electronics [005930.Korea] is next; it’s in Korea. The U.S. is next, with Intel [INTC].” What you’re going to get—particularly now with big semiconductor shortages—is the Chinese working overtime to produce their own chips.

That’s going to take a while.

No question. TSM is basically a foundry. They do the physical production, but hundreds of little fabless Taiwanese companies create all the software that’s necessary to go into these chips. We own several: Taiwan’s eMemory Technology [3529.Taiwan], WIN Semiconductors [3105.Taiwan], and Parade Technologies [4966.Taiwan]. Return on capital employed is very good because all they need are offices and a computer.

What about the risk to Taiwan as U.S.-China tensions flare?

It’s a risk we have to accept. These fabless companies have strong ties with Apple [AAPL] and Microsoft [MSFT] and usually have some base in Silicon Valley to service them so they can still operate without being in Taiwan.

What do you like in China?

We have Yum China Holdings [YUMC]. They have done a [good] job in improving the way they operate. We also own AK Medical Holdings [1789.Hong Kong]. There’s a lot to be done in [developing the healthcare system].

Are you worried about the U.S. and China decoupling?

I don’t think it’s going to happen. The government can say one thing, but the companies can say another. They don’t have to be in the U.S.; a lot are setting up in Dubai or the Cayman Islands.

Should investors be worried about the recent push to delist Chinese companies that don’t comply with U.S. auditing oversight?

It would be very easy for [Chinese companies] to meet the accounting standards. It’s a matter of pride [for the Chinese government] to refuse to allow these companies [to open their audit books]. And look at the turnover of these companies on the New York Stock Exchange! Do you think the brokers are going to allow these turnover conditions to go away? I doubt it. It takes two to tango: U.S. authorities will probably let up, and the Chinese will adjust their accounting over time.

There’s also increasing scrutiny of China’s human-rights issues, such as in Xinjiang and Hong Kong. How does your ESG approach allow for China investments?

We don’t look at the macro level in that sense. We know Xinjiang is a problem. We know human rights generally are a problem. A lot of people would say you’ve got to do something about human rights and change society. If we tried to do that, think of how many real democracies there are in the world today, particularly in emerging markets. It’s very difficult.

We look at the individual company to determine how they’re doing on measures of ESG, and culture. It’s amazing, over the years since I began investing in China, the improvements we’ve seen. The government has begun to impose certain ESG standards on these companies, which is a sign policies are moving in that direction.

In your latest book, The Inflation Myth and the Wonderful World of Deflation, you suggest that the recent worries about inflation are misguided. Why?

I wanted to denigrate the whole emphasis on inflation numbers. You hear the Federal Reserve saying, “Inflation has gone up by a half-percent; we’ve got to do something,” or economists saying, “You have to have at least 2% inflation, otherwise it’s no good for the economy.” This is all insane. Inflation numbers are based on a basket that’s changing every year. If you go back 10 years, the basket’s completely different and the quality of products has changed dramatically. Because of technology, we’re getting a deflationary trend where things are getting cheaper—and that’s accelerating in the emerging countries. This measure is not a very good way to make policy.

How should we measure inflation?

You should look at wages and income and measure the quality of life. As an old timer, the quality of my life has gotten a lot better: I can write an email, or the computer can access all this information—that didn’t exist when I was getting my Ph.D. at MIT. Prices are going up, but the reason is currency devaluation. Through history, there’s absolutely no currency in the world that has maintained its value.

What does that mean for the dollar’s status as the reserve currency?

The dollar peaked last March, and now it’s way down to 2018 levels. You’re seeing a number of things here. First, don’t underestimate cryptocurrencies. When you think of all the people who don’t want their wealth to be revealed, they’re using cryptocurrencies.

No. 2: The dollar is still the largest investment currency, but the euro is the largest trade currency. A lot of that has to do with zero interest rates, which make trade financing [in the euro] very attractive. And then you’re seeing the yuan coming up. China has already concluded currency swaps with a number of countries.

You’re going to find a general retreat from the U.S. dollar—not today or tomorrow. It’s a slow process. The most critical aspect for the dollar is the degree to which it can be used and traded around the world; that’s very important to people. One of the reasons it’s difficult for the Chinese to have a reserve currency is because they want to control it so much, but it’s remarkable that it has appreciated about 10% against the dollar since the middle of the last year. It shows the demand.

The star power is dazzling, but SPAC ETFs can differ greatly, making a difficult-to-understand and volatile product even trickier to invest in.

SPACs are shell companies that raise cash from investors through an initial public offering. The money is then used to acquire an existing (typically privately held) company, in order to bring it public with less hassle, and less scrutiny. Though SPACs have been around for decades, 2020 saw a strong resurgence. Many investors like the trend toward popular themes such as electric vehicles and green energy, though the real appeal has been the larger deal sizes and high-profile sponsors. About 250 SPACs raised $83 billion in 2020, six times more than in the previous year. Just six weeks into 2021, the numbers have already reached about half of 2020’s.

SPACs can be attractive in that they allow retail investors to participate in an IPO before the actual listing—something usually only available to venture-capital or private-equity firms—and potentially capture the big gains if the newly public firm turns out to be successful. But SPACs are risky because early investors don’t know what the merger target will be, nor is a deal guaranteed at all.

That’s why SPACs are also called blank-check companies. SPACs aren’t backed by any real business operations, yet investor anticipation for the next big hit can sometimes drive the price high, even before any deal is announced. Essentially, investors are paying for the reputation of the deal sponsor—and that can be pricey. If the merged company doesn’t live up to expectations, share prices could plunge.

A diversified exchange-traded fund can mitigate some of the risk and smooth the ride. Most, however, are very new, quite small, and considerably more expensive than the typical ETF.

The $106 million Defiance Next Gen SPAC Derived (ticker: SPAK) is the only passive, index-tracking fund devoted to SPACs. It currently has 136 holdings, weighted by market value. All its holdings must meet minimum liquidity and size requirements; the fund charges 0.45% annually. “The SPAC sponsors that can bring more capital to the table probably have a little bit more credibility and more chances to succeed,” says Defiance ETFs’ president, Paul Dellaquila.

The Defiance ETF allocates just 40% of assets to the newly listed pre-merger SPACs. The remaining 60% goes to the companies that became public after merging with a SPAC. Dellaquila says this can help offset some of the volatility in the SPAC market, and offer investors diversified exposure to the postmerger stocks.

That strategy can limit performance, however. While some stocks derived from SPACs saw substantial gains following their IPO—DraftKings (DKNG), for example, rose by 216% since it went public last April—others dropped sharply once the initial positive sentiment faded. Of the 115 completed SPAC mergers from 2016 to 2020, 65% of their stocks had declined a month after the merger closed, and 71% were down a year later, according to a recent study from Edge Consulting Group. The Defiance ETF plans to hold postmerger stocks up to two years after they go public.

Still, the fund has returned 31% in the four months since its inception in October, thanks to large positions in Virgin Galactic (SPCE), Skillz (SKLZ), and Open Lending (LPRO), as well as pre-merger SPACs like Churchill Capital (CCIV). Despite a nearly 10% position in DraftKings, it missed most of the stock’s gains, which occurred earlier last year.

The actively managed $179 million SPAC and New Issue ETF (SPCX), launched in December by Tuttle Tactical Management, is a purer play that invests only in pre-merger SPACs. For CEO Matthew Tuttle, SPACs are a unique asset class and shouldn’t be grouped together with the postmerger stocks. “They are not even cousins; they are totally different animals,” he says, citing the different methods of valuing and trading them. The fund usually sells a SPAC after a merger is announced. It charges 0.95% annually.

One of the big value-adds of an active fund, says Tuttle, is that it can subscribe to a SPAC’s IPO units at the trust value price, usually $10, while index funds and retail investors have to purchase those shares later, in the often slightly more expensive secondary market. Since SPAC shares can be redeemed for $10 plus interest at the time of the merger, the investment is essentially guaranteed not to lose money—other than a nick of inflation—even in the worst-case scenario.

The $40 million Morgan Creek Exos SPAC Originated ETF (SPXZ) is a mix of the other two approaches, and the most expensive, with a 1% expense ratio. Launched just a few weeks ago, the fund is actively managed, and invests in both pre-merger SPACs and postmerger stocks. Morgan Creek CEO Mark Yusko says he plans to put one-third of the assets in the first group and two-thirds in the latter; all holdings will be weighted equally. “People often say, ‘It’s so obvious Amazon is a winner,’ but that’s only in hindsight,” says Yusko, “You don’t want to make mistakes, and the best way to manage that is position size.”

As the SPAC market matures, the differences among these exchange-traded funds is likely to increase: The index-tracking fund will likely include most of the new names, while the active funds become more selective. The funds are also likely to adjust their allocations to pre-merger SPACs and postmerger stocks, depending on their relative performance and volatility. The Defiance ETF increased its allocation to pre-merger SPACs from 20% to 40% in January. Yusko also says that, if the SPAC market becomes more active, the Morgan Creek fund might allocate more to pre-merger names than it currently does: “We’re not gonna force ourselves to follow the guideline; it’s all about quality.”