Graduation day for Spacs as FTSE Russell shakes up index

Dozens of companies that entered public markets through deals with blank-cheque vehicles are set to graduate into the blue-chip Russell 3000 index on Friday, giving a potential boost to the fortunes of electric vehicle developers and other speculative ventures.

FTSE Russell, which maintains the popular benchmark, will reconstitute its indices by adding and subtracting companies based on their market capitalisations and other factors. 

Companies that join the Russell 3000 often receive a bump in their share prices, while gaining exposure to a wide swath of investment managers and inclusion in passive funds that track the index.

Investment vehicles with $9.1tn of assets either track or are benchmarked to Russell indices, according to FTSE Russell.

This year, the additions to the Russell 3000 index are set to include a number of early-stage electric vehicle companies that went public through special purpose acquisition companies, whose shares first soared and then declined as wild investor enthusiasm gave way to concerns about regulatory scrutiny of the sector.

Among them are Canoo, Lordstown Motors and Nikola, companies that have dealt with the departures of key personnel and face investigations from the Securities and Exchange Commission over their disclosures to investors. All three have said they are co-operating with regulators. 

Other notable additions will include the sports betting business DraftKings, healthcare company Multiplan and 3D sensors manufacturer Velodyne Lidar, according to a preliminary list published by Russell.

More than 20 per cent of the companies joining the Russell 3000 index this year will have gone public through Spacs, according to Steven DeSanctis, an equity strategist at Jefferies.

“You’re opening yourself up to a much larger audience,” DeSanctis said. “You should see an increase in trading volume for a lot of these stocks.”

Unlike the more widely-held S&P 500 index, Russell indices welcome companies that have not reported recent profits or substantial revenues, and include companies with market capitalisations as small as a few hundred million dollars.

The index reconstitution could add fuel to critics of Spacs, who argue the vehicles provide a less rigorous route to public markets compared to regular initial public offerings.

“The danger is that these companies went public without that vetting process,” said Usha Rodrigues, a professor of law at the University of Georgia who has researched Spacs. “There’s more of a risk to each shareholder in those individual companies and, to the extent that there’s a lot of them, to all the holders of the Russell 3000.”

An index of Spacs maintained by IPOX has fallen more than 20 per cent from a peak in the first quarter, as investors sour on the structure following a deluge of new offerings. The SEC has issued a series of warnings about Spacs to investors and the companies themselves, particularly concerning their sales and profit projections.

Several high-profile short sellers have targeted companies that have come to market via a Spac and will now be added to the Russell indices — but retail traders on Reddit forums have cheered the index reconstitution as a positive signal for popular stocks.

The Russell index changes go into effect after the close of trading on Friday; the session is usually one of the busiest trading days of the year as investors and index funds reshuffle portfolios in anticipation.