Thematic ETFs Boosted by SpaceX IPO Lose Altitude 

What goes up must come down, even for a rocket company and the many thematic ETFs it boosted. 

SpaceX dominated the headlines for weeks with its highly anticipated initial public offering in June, and several space-themed ETFs reaped the benefits. But now that the stock of Elon Musk’s company has fallen 38% from its all-time high to trade close to its $135 IPO price, those funds are feeling the Earth’s gravitational pull. The Tema Space Innovators ETF (NASA) has plummeted back almost to its late-March launch price. The State Street SPDR S&P Kensho Final Frontiers ETF (ROKT), which doesn’t hold SpaceX, has fallen too, as have the Procure Space ETF (UFO) and ARK Space & Defense Innovation ETF (ARKX).

The broad declines underscore the risks of thematic funds, which focus on everything from AI to energy and cannabis, and have become increasingly popular among investors thanks to their ability to offer exposure to niche areas of the market via an easy-to-use and often low-cost wrapper. But they also appeal to investors’ worst instincts and can lead to poor outcomes, even when the underlying theme ultimately succeeds, says Kenneth Lamont, principal in manager research for Morningstar UK. 

“Investors are generally poor at timing markets, and this challenge is particularly acute in thematic investing,” Lamont said. “Many thematic funds are launched during periods of intense excitement, encouraging investors to buy in at elevated valuations, often just before a significant market correction.” 

No Ticket to Space 

The recent performance surrounding the SpaceX IPO highlights an important distinction between having an investment thesis and simply buying into a theme, explained Matthew Smart, director of financial planning and portfolio analysis at WWM Investments. 

“Investors may have been excited about SpaceX, but purchasing a space-themed ETF is not the same as investing in SpaceX,” he added. “It’s a reminder that investors aren’t buying one company, they’re buying an entire portfolio, and the success of that portfolio depends on much more than a single headline name.” 

That’s not to say investors should shun thematic funds: 

• Thematic ETFs can certainly have a place in portfolios, particularly when an industry is still developing and clear long-term winners have yet to emerge, Smart said. 
• Lamont said that the odds of selecting a winning thematic manager are stacked against investors. But for those who choose to invest in thematic funds, maintaining valuation discipline and adopting a long-term buy-and-hold approach can help curb some of the key risks.

Lessons Learned. The sell-off of SpaceX and funds that hold its stock may serve as a warning to investors as Wall Street readies for the debuts of other mega-cap unicorns, including OpenAI and Anthropic. “When performance deteriorates, investors frequently panic and sell, crystalizing losses,” Lamont said. “The inherently higher volatility of thematic funds amplifies the consequences of these behavioral mistakes.”