SpaceX Stake Surge in ETF Sparks Liquidity Concerns Over Private Assets
A modest initial investment in SpaceX has transformed into a dominant position within a specialized exchange-traded fund, raising significant questions about the viability of incorporating private, illiquid assets into daily-traded ETF structures. The ERShares Private-Public Crossover ETF, known as XOVR, now holds approximately 37% of its portfolio in Elon Musk's rocket company, with this figure occasionally exceeding 40% in recent trading sessions according to Bloomberg data.
Regulatory Boundaries and Concentration Risks
This concentration level is virtually unprecedented for private company holdings within an ETF framework. United States Securities and Exchange Commission regulations typically limit open-ended investment vehicles to allocating no more than 15% of their assets to illiquid securities. This safeguard exists specifically to ensure funds can meet redemption requests during periods of market stress without compromising investor protection.
The mechanics behind this dramatic shift reveal inherent challenges in managing daily-traded funds containing hard-to-sell assets. During a period of substantial investor inflows coupled with SpaceX's rising valuation, the fund's private holding expanded significantly. When subsequent redemptions occurred, the ETF managers opted to sell more liquid public stocks rather than attempting to offload the SpaceX position, which lacks an active secondary market. This decision-making process naturally resulted in the private asset becoming increasingly dominant within the portfolio composition.
Renewed Industry Debate
The rapid evolution of XOVR's asset allocation has reignited industry-wide discussions about whether the hyper-liquid ETF structure can safely accommodate private market investments. Additional questions center on precise definitions of illiquidity and appropriate valuation methodologies for assets that trade infrequently.
Jeffrey Ptak, managing director at Morningstar Inc., expressed skepticism about the fundamental premise. "It makes me more dubious about the proposition of stuffing hard-to-trade assets into daily-liquidity vehicles like ETFs," Ptak commented, having recently published a critical analysis of the fund. "The ETF is saddled with a huge concentration in a hard-to-trade-and-value security."
The Liquidity Mismatch Challenge
Over the past two years, numerous fund issuers have actively explored methods to incorporate unlisted assets into ETFs, aiming to provide retail investors with simplified access to private markets. The central obstacle remains the fundamental liquidity mismatch: ETF shares trade continuously throughout market hours, during extended sessions, and increasingly in overnight markets, while private assets are notorious for their limited trading frequency and opaque pricing mechanisms.
XOVR represents one of only a few ETFs that have successfully integrated private securities into their holdings. The SpaceX position, currently valued at approximately US$205 million, is maintained through a special-purpose vehicle with undisclosed operational details.
Management Perspectives and Regulatory Silence
Joel Shulman, founder and chief investment officer of ERShares, acknowledged having a strategic plan for managing the substantial SpaceX exposure but declined to elaborate on specific details. "There is robust investor demand, which should support liquidity and facilitate orderly sales if needed in a relatively short period of time," Shulman stated. "However, we have high conviction for this investment and would prefer to maintain the investment for the benefit of our shareholders."
The SEC has maintained its policy of not commenting on individual fund exposures or specific portfolio compositions, leaving regulatory interpretation open to ongoing market observation and analysis.
