Why the space industry could be rocket fuel for your portfolio

The space industry has been the subject of increasing interest in recent years as the cost of rocket launches has come down and more satellites have gone into orbit.

There have also been more headline grabbing events like the recent Artemis II crewed flyby of the Moon or the celebrity-laden space tourism flight into suborbital space from Amazon’s Blue Origin.

Throw in the largest IPO in the history of the world and you get a confluence of events that have driven higher investor demand for exposure to the thematic.

I spoke with Betashares Investment Strategist Hugh Lam about the Space Industry ETF (ASX: RCKT), how the emerging theme is positioned, why investors are seeking exposure, and what impact the high-profile SpaceX IPO will have on the sector.

“What the IPO shows is that the commercial opportunities available in space are bigger than what many people think,” Lam says.

“The investment opportunity is really there for investors to tap into. I think the other thing is that we're seeing advanced technologies or technologies enabling more space activities.”

Launch costs falling fast

An important factor behind the launch of the Betashares Space Industry ETF is the decline in cost for low Earth orbit launches.

Just 10 years ago the price per kilogram for a Delta IV Heavy rocket to send a payload into LEO was around US$14,000, while a SpaceX Falcon 9 was around US$5,000.

Now, the newer Falcon 9 has almost halved its cost and the Falcon Heavy is even cheaper. SpaceX’s next-gen Starship rocket is targeting a price of less than US$200 per kg.

“Reusable rocket technology is also another factor that has allowed more and more satellites up into space,” Lam says.

“The technology right now can enable more things to be done effectively in space. So that's why we have launched right now.”

What's powering the RCKT?

The Betashares Space Industry ETF tracks the Solactive Space Industry Index and has exposure across the “whole space ecosystem”, from launch activity to satellite manufacturing companies, satellite infrastructure and earth observation.

One of the top holdings within RCKT is Rocket Lab (NASDAQ: RKLB), which Lam describes as an “end-to-end space company”.

“They do a little bit of everything. They do a little bit of launch activities, they have a business unit called Space Systems, which means they do things like reaction wheels, star trackers, and even software for space,” he explains.

“Interestingly, that Space Systems business is actually generating more money than their launch services business.”

AST SpaceMobile (NASDAQ: ASTS), which is a direct to cellular company, is the top-weighted investment for RCKT at the moment.

“Their use case really is for people in underserved regions of the world, they can get direct connectivity on their phones by using their technology,” Lam says.

“They've already partnered with US telco providers such as AT&T, Verizon, etc, in order to provide end customers direct to cellular connectivity.”

On the Earth observation side of the equation is Planet Labs (NYSE: PL), which Lam concedes most investors won’t be familiar with.

“They are observing the Earth every single day and you can imagine this is a very unique data set that they can use to sell to other customers,” he says.

“Of course, they integrate AI on top of that to augment the data and get richer insights, but some of their major customers involve the US Department of Defense, the US Navy, they generate about half of their revenues from that segment.”

SpaceX on the horizon

The makeup of RCKT is soon to change quite dramatically, with a fast-track mechanism for relevant companies going public to be included in the fund set to get its first workout when the SpaceX IPO hits.

“Indices typically would have a seasoning requirement before an IPO gets into an index, which means you've got to wait a long period of time. This ETF has a fast-track mechanism or inclusion that means if a company IPOs and it reaches a particular threshold, after two trading days, that company can enter the index,” Lam explains.

“SpaceX is obviously planning to IPO, as we've talked about. Two trading days after, we'd expect SpaceX to enter the ETF and it would be held at a 25% weight within the ETF.”

Balancing the opportunities and the risks

There aren’t many industries where the volatility can come in the form of an explosion, but that’s something that space sector investors will need to contend with at times.

“We saw this when Blue Origin's rocket blew up. This is Amazon's rocket and what this caused was a bit of uncertainty obviously across space systems and launch companies.”

That recent incident was followed by a broader sector sell off.

Lam adds that these risks are heightened if investors are are picking individual stocks within a “very fast moving emerging theme”.

The risk is you pick a loser. That's where the benefit of an ETF really comes into play. You're not looking to pick the winners or losers and that's really important in an emerging theme.

“You really want to capture that narrative as a whole within a liquid, transparent, cost-effective wrapper.”

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Betashares Space Industry ETF (RCKT)

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