The Procure Space ETF (NASDAQ:UFO) has a great ticker and an exciting theme (space exploration), but it doesn’t look like it’s quite ready for blastoff yet. While there are some things to like about it, I’m cautious about this space-themed ETF based on its underwhelming performance track record, some of its holdings, and its relatively high expense ratio.
What is the UFO ETF’s Strategy?
Procure says, “Space has always captured human interest, but recently, the space economy has also captured commercial interest like never before. UFO, the Procure Space ETF, may provide diversification beyond the limitations of solely earthbound companies.”
This is among the more creative descriptions I’ve come across for an ETF, but what does it entail?
UFO invests in a portfolio of space-related companies. It tracks an index called the S-Network Space Index. At least 80% of the index’s weight is allocated towards companies that derive the majority of their revenue from space-related industries.
These space stocks can include rocket and satellite manufacturers and operators, companies involved in satellite-based telecommunications, radio and television broadcasting, space technology and hardware, ground equipment manufacturing dependent on satellite systems, and space-based imagery and intelligence services.
Furthermore, the index provider believes that additional space-related industries may emerge in the future, such as space tourism, space-based military and defense systems, and space resource exploration and extraction. These are all exciting use cases, but remember that none of them have emerged as truly viable businesses yet.
Otherworldly Holdings
So, what does UFO’s portfolio of space stocks look like? The fund owns 35 stocks, and its top 10 holdings account for just under half of its assets. Below, you can take a look at an overview of UFO’s top 10 holdings using TipRanks’ holdings tool.
The fund’s top holding is Sirius XM Holdings (NASDAQ:SIRI), the satellite radio provider that recently enjoyed a surge in interest when 13F filings revealed that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) had invested in the company. Garmin (NYSE:GRMN), which utilizes GPS technology in everything from its navigation systems to its watches and fitness trackers, is the second-largest holding.
UFO’s holdings run the gamut from some sensible and compelling choices to some more questionable ones. I like the fact that UFO’s portfolio includes a number of leading defense and aerospace stocks like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), and RTX Corporation (NYSE:RTX). These companies are developing cutting-edge space-related technologies, have strong and stable earnings, and enjoy significant moats around their businesses.
On the other hand, I’m less excited by top holdings like Virgin Galactic (NASDAQ:SPCE). Despite plenty of hype, the space tourism company has failed to turn a profit. It soared to a price of over $50 a share in 2021 before plummeting back to Earth. The stock currently trades for under $2 a share.
In fact, Virgin Galactic has a Smart Score of just 1 out of 10, the lowest possible Smart Score. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. Meanwhile, a score of 1, 2, or 3 is considered equivalent to an Underperform rating.
While UFO owns some stocks with Outperform-equivalent Smart Scores like Sirius XM, Garmin, and Trimble (NASDAQ:TRMB), it also owns its fair share of more questionable holdings such as Virgin Galactic, Blacksky Technology (NYSE:BKSY), Terran Orbital (NYSE:LLAP), and Ast Spacemobile (NASDAQ:ASTS) which feature poor Underperform-equivalent Smart Scores of 1 and 2.
Altogether, one would have to say that UFO’s portfolio is something of a mixed bag. Its neutral Smart Score of 6 out of 10 reflects this.
Has UFO’s Performance Been Out of This World?
While the theme and ideas are interesting, unfortunately, UFO hasn’t exactly gone into orbit when it comes to its performance since its inception in 2019. Not only has the fund badly underperformed the broader market in that time, but it has actually lost over a third of its value since launching in 2019.
UFO managed to climb 7.2% in 2021, during the low interest rate environment and a time when many speculative stocks were doing well, but it fell 25.9% in 2022 and is down another 16.1% this year.
UFO ETF’s High Expense Ratio
Unfortunately, these results do not justify the relatively high expense ratio of 0.75% that UFO charges. This expense ratio means that an investor putting $10,000 into UFO would have to pay $75 in fees during their first year as an investor in the fund.
Assuming that the fund was to return 5% per year going forward and maintain this 0.75% expense ratio, this investor would pay $931 in fees over the course of a decade.
Part of the reason that UFO charges such a high fee is that it is a relatively small ETF with just $35.6 million in assets under management (AUM), but this is still pretty steep for an index fund.
Is UFO Stock a Buy, According to Analysts?
Turning to Wall Street, UFO earns a Moderate Buy consensus rating based on 21 Buys, 15 Holds, and one Sell rating assigned in the past three months. The average UFO stock price target of $22.38 implies 38.7% upside potential.
Not Ready for Blastoff Yet
The UFO ETF has some good things going for it. It provides exposure to a unique and promising long-term theme and invests in stocks with different types of exposure to space. It owns some strong stocks like Garmin and the defense companies discussed above. Wall Street analysts also seem to think that the ETF has room for upside. Additionally, UFO pays a dividend and currently yields 2.8%.
On the other hand, there are also plenty of reasons for caution, leading me to stay on the sidelines for now. It owns a number of less compelling holdings with poor Smart Scores. The ETF’s performance since its 2019 inception has been uninspiring, to say the least, and it’s hard to justify its steep 0.75% expense ratio based on this performance. Space is a promising long-term theme that should come into more prominent focus over time, but for the time being, UFO doesn’t seem like a compelling Buy.
