New space race offers out of the world opportunity

The space race was never far from the front page of the newspaper when I was growing up,  It pitted the Soviet Union against the United States in a Cold War show of power politics with each side winning big victories.

The Soviets launched the first satellite in 1957 called Sputnik. They sent the first man into space in 1961, beating the Americans by a month. The Soviets sent the first woman into space, but the US was first to land on the moon in 1969, going on to Mars which it has since visited eight more times.

Sixty-five years later things have changed, creating opportunities for investors. What was once about nationalism and one-upmanship is about business opportunities. An industry created by governments has evolved into one dominated by large corporations, often in partnership with governments. The US space agency, NASA, has contracts with more than 300 companies for space craft, components and services. These companies are launching satellites to handle 5G communications, fostering space tourism, building space stations and designing rocket propulsion systems.

Some of the headlines since early April are truly amazing:

• NASA’s rover made 10 minutes of breathable oxygen on Mars. The main reason isn’t to sustain life, but for use as a rocket fuel, so the Moon and Mars can become staging points for further exploration.
• A Northrup Grumman satellite grabbed hold of another satellite in earth orbit that was running low on fuel and moved it back into place. It is just the second successful space repair of its kind.
• NASA chose Elon Musk’s SpaceX to build a lander that will return humans to the Moon this decade.
• China landed its first spacecraft on Mars and after a five-year hiatus, China sent three people to its orbiting space station for an extended stay.
• A super rich space tourist paid US $28 million to book a ride in July with Amazon billionaire Jeff Bezos aboard his Blue Origin spaceship.

Just as I started writing this article, Sir Richard Branson’s Virgin Galactic announced that the Federal Aviation Administration has granted the company a license to fly passengers on future spaceflights, a key hurdle following three test flights in May.

Suborbital space tourism is the smallest component of this opportunity. The big one is communications in all its forms. Another growing area is space construction, which includes subcontracts for the crafts and components.

Global communication needs are huge and constantly expanding with demand for 5G cellular and more internet capacity top of the list. New satellites are also needed for navigation systems including the GPS in your car, global shipping and military communications. Weather forecasting too.

While we think about satellites as huge round things with antennas and solar panels, many are now the size of a tennis ball clustered together in groups. There are currently 2,000 satellites in low earth orbit, but that is estimated to grow to 16,000 within a decade. And once in orbit, someone has to repair them. 

Here’s a look at two new ETFs that are focused in this area. Both were launched in April. One is actively managed by Cathie Wood’s ARK Investment Management in New York. The other is passively managed by Harvest Portfolios Group in Oakville, Ont.

 Harvest Space Innovation Index ETF (TSX: ORBT) Closed Monday at $20.88

Background: This  ETF follows an index designed by Solactive AG and holds 40 companies engaged in the development of products and services related to satellites, space flight, space stations and space tourism. 

Performance: The ETF is up 4.40% since its April launch at $20. It has a 0.50% management fee and $3 million in assets. It may pay an annual dividend.

Holdings: About 42% of the holdings are in space equipment and services. Another 42% are in satellites and communications. About 12% is in space tourism.

The top holdings are: Emcore Corp. (3.4%) which designs and manufactures chips, components and systems for navigation. ORBCOMM Inc. (3.2%) makes  industrial Internet of things and machine to machine communications hardware. Gogo Inc. (3%) provides inflight connectivity and wireless entertainment services to the aviation industry. The top 10 includes Northrop Grumman, Lockheed Martin Corp. and Raytheon Technologies Corp. Virgin Galactic is also a holding.

Discussion: Most of the companies are based in the U.S. (70%) and Europe (16%).  Most are  large and well established with diversified businesses. About 40% are mega caps with valuations  greater than US $10 billion. Another 40% are between $1 billion and $10 billion with the remaining 20% between $100 million and $1 billion.

 It is a balanced group with deep pockets, a history of profitability in core businesses and the  resources to exploit the emerging opportunity. 

Emerge ARK Space Exploration ETF (NEO:EAXP)  Closed Monday at $9.93

Background:  This ETF is managed by Catherine Wood’s Ark team. It aims for exposure to companies involved in innovative technologies that include orbital and sub-orbital aerospace,  internet access, GPS and location and space construction. The ETF  is sold here by Emerge Canada Inc.

Performance: The fund was also launched in April. It is down 0.7% from its $10 issue price. It has a higher management fee than Harvest at 0.80% and a similar $2.9 million in assets. It may pay an annual dividend.

Holdings:  It holds between 35 and 50 companies and has a similar geographic diversity to the Harvest fund. The ETF currently has 41 holdings of which 70% are in the U.S., 12% in Europe and 15% in Asia.

There is also overlap in subsector holdings with Harvest as well, although weightings differ.  It holds a little over half (51%) in industrial companies, 23% in information technology, 11% in consumer discretionary and 11% in communications.

 The top holdings are navigation and software provider Trimble Inc. (8.6%), Chinese e-commerce company J.D.com  (6.28%) and defence contractor Kratos Defence & Security (5.68%) 

Discussion: Both funds look at a similar basket of companies with some differences. Ark Emerge includes construction companies such as John Deere and Komatsu. As well, active stock selection makes Ark Emerge more nimble than Harvest since it can rebalance more quickly. On the other hand, it has a higher management fee.  Both offer a balanced group of established companies.  The choice comes down to which style of management you prefer.

This is an edited version of article that appeared in the Internet Wealth Builder on July 5, 2021.  For information on how to reprint this article please view this page.