A new exchange-traded fund is among the first such vehicles to invest in private companies, including Elon Musk’s SpaceX.
The space rocket company, which along with the United Launch Alliance and Blue Origin Enterprises, recently received contracts totaling $13.7 billion from the U.S. Space Force, a branch of the U.S. military, to launch space missions between 2028 and 2032. Of that total, SpaceX will receive $5.9 billion to fly 28 missions.
SpaceX represents a significant 12% weighting in the ERShares Private-Public Crossover ETF, which trades under the ticker XOVR and bills itself as the first crossover ETF that enables institutional and retail investors to invest in both public and private equity securities. XOVR now has about $300 million in assets and carries a gross expense ratio of 0.75%.
Joel Shulman, founder and chief investment officer of ERShares, said XOVR tracks the Entrepreneur 30 Total Return Index, its proprietary rules-based index focused on U.S. large-cap entrepreneurial companies.
XOVR typically allocates about 85% of its assets to public entrepreneurial companies, with the remaining 15% targeted to private equity opportunities, including pre-IPO giants such as SpaceX.
“We launched ERShares with a mission to democratize retail access to private equity,” Shulman said. “SpaceX, as a top holding, exemplifies this goal.”
On Aug. 29, 2024, XOVT was relaunched as a conversion of a prior ETF called ERShares Entrepreneurs ETF and its ticker was changed from ENTR. Under the new arrangement, XOVR could invest in private companies, but both ETFs focused on large-cap entrepreneurial stocks.
Shulman explained the conversion was partly due to the underperformance of ENTR, but also because “our own proprietary Entrepreneur-30 Index was significantly outperforming our ETF as well as the other major indexes for many years.”
For example, in 2020, ENTR returned 50.3%, while the ER30TR index soared 72.9%. In 2021, ENTR fell 8.5%, while the index slipped 6.4%. In 2022, ENTR dropped 41.1%, but the index fell 37.6%. In 2023, ENTR jumped 51.9%, while the index climbed 57.4%.
In addition, he noted, the private equity market has exploded into a $13 trillion global market behemoth from $1 trillion in just the past 20 years along with the rapid growth of ETFs.
“Moreover, our ‘entrepreneur model’ starts on the private side,” he said. “We actually employ a proprietary venture capital model when selecting our publicly traded securities. For us, to include private equities is consistent with our existing methodology and investment strategy.”
Since Aug. 29, 2024, the rebranded XOVR ETF has thus far outperformed both the comparative indexes like S&P 500 and Russell 1000 Growth and the ER30-TR benchmark. “(XOVR) also moves very closely to the ER30TR benchmark as it is at least 85% invested in this benchmark,” Shulman added.
Since the Aug. 29, 2024 relaunch date through April 15, XOVR has returned +2.76%, compared with a 0.96% return for the ER30 TR Index, while the S&P 500 index slipped 2.7%.
XOVR’s most prominent individual holding, SpaceX, has partly driven the ETF’s performance.
SpaceX was initially purchased for a price of $135 per share on Dec. 3, 2024 and within a week the rocket maker announced a tender offer at $180 per share, giving it a $350 billion valuation.
“It was a very fortuitous purchase that appreciated more than 37% in the first week,” Shulman said. “Clearly, this was an unusual situation and we informed the public not to expect these types of occurrences going forward. Having said this, the private markets have appreciated the SpaceX position, but we have not yet marked it higher as we are being conservative.”
Shulman said XOVR is the only ETF that currently holds SpaceX.
Risks of private market ETFs
XOVR invests directly into a private company as well as through a special purpose vehicle, which Shulman declined to name.
“To date, we have purchased only SPVs owing to the specific securities and pricing opportunities,” he said. “However, we expect to buy positions (in private companies) using a variety of methods.”
Aside from XOVR’s biggest holding, SpaceX, XOVR also holds a small position in Klarna, a private Swedish fintech firm that recently paused its planned IPO due to tariff concerns.
“We would like to focus on late-stage companies that are preparing for an IPO,” he said. “We keep below 15% private to stay within our SEC mandate.”
As for Klarna, Shulman said his firm is very familiar with the ‘buy-now-pay-later’ category of payment companies, having already owned such similar firms as AfterPay and Affirm in various funds.
“We saw Klarna as a company with double the revenues of Affirm, (but) without the losses,” Shulman said.
Shulman also indicated he is seeing considerable interest from institutional investors for ETFs holding both public and private companies.
“Our key partner is Pentegra Retirement Services, White Plains, NY they are the oldest public pension fund and handle the money for the Federal Home Loan Bank,” he said. “They have been very supportive of our efforts for many years. Pentegra seeded our early mutual funds and ETFs.” Pentegra has more than $13 billion in assets and also provided some seed capital for XOVR's predecessor mutual fund ENTR
So, how does ERShares value private assets? Shulman contends that his firm has expertise as a fairness opinion provider for pre-public transactions.
“We are working with some of the leading private data companies to help make their databases more reflective of reality,” he said. “Clearly, with the markets in decline since (February) we believe our position of not increasing the prices of our private positions has been prudent.”
Shulman also admits that the growing controversy surrounding Musk with respect to his DOGE activities and his stewardship of Tesla presents a risk to investors. Several pension funds have pledged to divest from Tesla.
“No question that SpaceX is a target for people who are anti-Musk and anti-DOGE,” he said. “However, SpaceX has become a strategic asset for the U.S, government and has military intelligence ties. This company is also more efficient than NASA or Blue Origin. Musk may fade, but we maintain that the SpaceX position will not decline as quickly as a Tesla position.”
SpaceX, he noted, may eventually get humans to other planets, but the key benefits of this company lies with its ability to quickly fill the sky with intelligence-gathering satellites.
While Shulman expects to see more ETFs investing in private companies in the coming years, he is quick to point out that many competitors “will not be willing to engage in all the additional work and hire outside expertise to engage in an initiative that simply generates considerably more effort with no incremental management fee.”
Shulman said the firm’s subadvisers are Capital Impact Advisors and Seaport Global Advisors, who together manage approximately $350 million in assets.
However, ETFs holding private assets present some risks to investors.
Bryan Armour, director of ETF and passive strategies research for North America at Morningstar Research Services, a wholly owned subsidiary of Morningstar, commented that private assets are generally illiquid and lack transparency, which makes it difficult to value or to trade.
“Investors could be wondering what exactly are they buying?” he said in an interview. Armour noted that there yet exists no standard uniform method of giving valuation to private assets, which presents a challenge for both ETF providers and investors.
Moreover, the difficulty and complexity of valuing private assets would tend to lead to higher expense fees for such ETFs, he added.
In addition, tax-efficiency, one of the most vaunted characteristics of conventional ETFs, would likely be compromised in an ETF vehicle holding private assets due to complexities that arise from gains and losses during liquidation, he noted.
“Private assets may carry embedded costs that aren’t clearly articulated by the ETFs that hold them,” Armour added.
State Street Corp. and Apollo Global Management teamed up to create a new private credit ETF called SPDR SSGA IG Public & Private Credit ETF, which trades under the ticker PRIV. But Bloomberg reported that no new money has flowed into the ETF since March 4.
The ETF has about $54.6 million in assets.
