The Space Sector is Ready to Blast Off (Episode 7)

So early on, when we launched, procure, we had the idea of wanting to launch the first pure play space ETF. And when going about using a passive strategy, selecting an appropriate index to license becomes really important because ultimately that's the lifeblood of the fund and what it ultimately will track. So we had heard of some other parties that we're working on space indexes, and one party also became aware that we were interested in launching a space ETF. And so we started speaking with S network learned about what they had been developing and found out that they had actually partnered with a space expert that had been, uh, developing this type of concept for a long time in advance and teamed up with S network. We got to sit down with them, look at what they had put together, tried to, to make sure that it had a lot of the different features that we typically look for from kind of an end user investor perspective.

Um, some of my background prior to starting procure was being a lead market maker for ETFs. And so understanding what the market making community typically looks for in structure and some other market participants, these various features to, uh, to an actual fund were things that we spoke with the index provider with. And ultimately after kicking the tires for a little bit, we were really pleased with what they had put together and having the comfort of, you know, one of the individuals working on this project by the name of Michael Walter range, he was actually a former director of research for the space foundation. And when you actually look at the calculations, uh, in the space report, which is probably one of the most followed space research market industry reports that comes out every year, he had actually helped develop the structure, the model for determining the size of the space industry tracking the growth year over year, defining the technologies and the companies involved in the space industry. And we thought that this really set this index apart from anything else that we had seen. And we were thrilled to be able to, to license this index for mess network.

So whenever I decide to launch a fund, one of the things that I look for is, you know, a belief that this is a long-term industry and it doesn't need to mean that we're at the very early days of this being a long term industry. But certainly one that we believe is an industry that will become a critical part, if not already a critical part of either technology or just sectors that we are already familiar with, but ones that become larger industry segments of existing sectors and space is something that since the start of the space program, we had seen, you know, some major developments early on, but over the next several decades, a lot of innovation had slowed down. A lot of old technology was still being relied on, but what we noticed around the time and of the launch of this fund was that there were many different kind of technological changes and inflection points going on for the space industry that had us excited, you know, and also gave us a belief that there were many people that wanted to invest in the space industry, but having a diversified vehicle that's actually providing a predominantly pure play exposure to this theme was something that was absent from the marketplace.

So part of it, it was, you know, realizing that from our point of view, that space was something that we were, you know, already reliant on. And as technologies advance, there would be many more ways that we'd be able to incorporate space into previously familiar and existing industries that some of these technological changes, for instance, reusable rockets are helping to significantly drive down the cost for launch, which is helping companies send things into outer space, cheaper, helping them send things up more frequently. And the barrier to entry has now been significantly reduced. So the types of space technologies that can be sent to space, the R and D that can be done, became so much more affordable, that it started opening up significantly many more commercial opportunities. And so that's just one example of one of these major trend changes that we've seen for the space industry. That seemed like this was a, an interesting inflection point, allowing more technologies to see the light of day more companies to enter the space industry. And also a lot of private investment in space companies that were now seeing these space companies mature to the point where they were themselves entering the public markets via IPOs or specs or other methods

Never?

I embrace it.

So I'm glad that you brought up specifically this instance of moon. So some people are confused by different products out there, and unless you look under the hood, you might not actually know what you're investing in. So the moon ETF is actually one that focused on moonshot, technological opportunities. And while there may be some space companies, it doesn't have a focus on space and it's actually using the, the phrase moon to represent moonshot and companies like Google through their Google ventures arm will talk about, you know, how they look for investing in moonshot opportunities. And that doesn't necessarily mean these technologies have anything to do with space industry technologies. Mm-hmm . So, you know, it's really important to look under the hood and, you know, something like moon, uh, brought out by direction may have some space exposure, but ultimately that I believe is probably less than 10% of the exposure. Yeah. They have had names like Virgin galactic, which is a pure place based tourism company. But as far as its index operates, it's not looking for, you know, pure place based opportunities. And it's possible that in the future as index is rebalanced, there's no requirement for it to have any space related exposure.

Yeah. I think every industry investment approach investment structure is going to vary. And ultimately what UFO is, is looking to do is to invest in publicly traded companies from around the world that are specializing in different areas of space. And one of the important things in, from my perspective that the index does is it actually looks for revenues generated from space, activities, businesses, and services. So when you look at the publicly available space companies that are out there, you're going to find the ones that are driving significant percentages of their revenue from space are likely to end up in the index. So space companies will certainly be tied to various changes in the space industry. And there are many overlaps for space companies that, you know, might make them consumer good sector types of companies. It might make them communications companies, even military and defense utility companies in some cases.

So there are many different types of space companies. Some have all their space, assets and outer space. Others are utilizing things like GPS to help a product here on earth. If you think like a garment that helps use GPS for navigation, for tracking goods and services, where companies assets might be at any given time, say they're on a boat and you want to know in real time where those assets are. So it's not just technology industry for these companies. And, you know, as governments spend more on space, you know, it's possible that these companies could be beneficiaries of gaining some of these government contracts, whether that's, you know, from a space agency like NASA, or whether it's from space force or a foreign military that needs secure communications via satellites. So there are many different drivers for this industry. Some drivers could affect, you know, widespread these companies in the space industry. Some might only affect a certain portion of them. So I think that's one of the interesting things about investing in space and using diversification because you're getting exposure to many different companies from around the world, specializing in all different areas and not all of them are necessarily gonna trade in lockstep, but certainly volatility is something that many different types of sectors of the economy are exhibiting today. And space has not been spared from that volatility.

Absolutely. So if you look at the breakdown of the holdings in UFO, you'll see roughly 40 plus companies. And some of these are companies that are household names like Lockheed Martin Raytheon companies that have more diversified business lines have been around for decades. In some cases, and space is just one portion of what they do, but we've also seen pure play space companies like Maxar, which is a, a fairly large fund holding. And that's a company that's been around, has done numerous M and a activities spinoffs, uh, restructurings, and is now, you know, a major player in the satellite manufacturing and operation area. But like you mentioned, most recently specs have become a really popular way for private space companies to go public. And in the most recent rebalance back in December, there were actually eight names that were added into UFO and seven of those eight were actually previously dispatched companies.

So one of those companies is rocket lab. They are a launch and satellite manufacturing company. They help launch, uh, you know, do various launch services for spacecraft components, launching satellites and sending other spacecraft into orbit and providing on orbit management solutions for those spacecrafts. So they're a company that was already generating revenues before they iPod. And, um, you know, in a competitive part of the space industry, which is launch they've so far, you know, demonstrated significant capabilities and they'll be able to service various types of clients. Then you have another company like red wire that has a really wide range of what they do. They have, uh, infrastructure entities, they do manufacturing, they're working on 3d printing, servicing and assembly in space. And that's really important. And when you think about humanity, expanding beyond earth, one of the difficult things is actually providing life support and providing, you know, basic materials for human survival.

In some of the toughest places, you know, in the universe space, the moon Mars may be beyond. And if you can actually print things using 3d printers in space, as opposed to every time you need a new tool, you need to send it from earth into outer space takes a lot of time could be very expensive and there's risks that might not make it there. If you could actually manufacture the hammer that you need through using a 3d printer, you could save an incredible amount of time and money. And so, you know, that's just one of the kind of technology business lines that a company like red wire's working on. And it's exciting to see that, you know, even earlier stage publicly trading companies, even though red wire's been around for a while, can specialize in numerous areas, hopefully fulfilling important demands for the broader space industry

Yeah, so, you know, Raytheon falls into one of two buckets that we have for the underlying index. So we have pure play companies, which are defined as those that derive a majority of their revenue from space related business activities and services. So that's where you'll find, you know, several of these newly added companies, some of them might be smaller, might be newer, but they're a pure play focus on space, but also realizing that some of the biggest players in space happen to be some of these more diversified companies. It seemed important for them to have the ability to be included, but not necessarily have these very large market cap companies that aren't purely focused on space having their other business lines be what's really moving the overall fund. So when looking at these diversified, so the other tranche of non pure play companies, it's important that they're doing a lot in space.

So companies that are over 20% of their revenues, but less than 50% of their revenues or, or companies that are generating over 500 million in revenues annually from space are ones that can be added into this up to 20% tranche, which is these diversified companies. So at rebalance, you're getting, you know, roughly 80% or more focused on these pure play companies and then up to 20% on these more diversified ones. So think, you know, Lockheed Martin, Boeing, that they work on the United launch Alliance, it's a JV for these companies and it's a major launch player. They're doing incredible things. It might not be their sole focus, but they're still potentially a place if they're doing enough space business. And then there's also typical liquidity minimum thresholds that companies need to have. There was actually one company that was removed at the last rebalance because I no longer met those minimum liquidity thresholds. So think over a million dollar daily value traded over 200 million us and market cap. And, you know, the companies that are north of those that have the certain revenue profiles from space, have the ability to make it into the index.

Absolutely. I really appreciate your interest. And for helping us share the story, it's an industry that we're really excited about. We're, uh, coming up on a three year anniversary of UFO in April, but if people want to get information about the fund, other things that we're working on, you could come to our website, www.procures.com, and you could find all the various materials for UFO. And if you have further questions, you could find contact information and you could call us or send us an email with your questions. And we're happy to get back to you.

It would be my pleasure. Thanks so much, Kate.

Alright.