Certain mutual fund complexes have long dabbled with stakes in private companies, and in recent years investment groups have started to do the same with ETFs. However, one high-profile case is now testing the limits.
The ERShares Private-Public Crossover ETF is specifically designed to “democratise” retail investor access to private companies. Most of its holdings are a host of big founder-led public tech companies, like Meta, Nvidia and Palantir, but it aims to have up to 15 per cent of its assets in private companies — the maximum permitted by US regulators.
Its main selling point has been a slice of SpaceX, which it announced to great fanfare back in 2024. It then trumpeted an increased investment in 2025, increasing its weighting in the XOVR ETF to 11 per cent of the fund. It also holds some shares in Anduril, but the ETF basically deliberately sought to become a public market proxy for one of the hottest private companies in the world.
There have long been concerns that XOVR’s performance has diverged from SpaceX’s swelling valuation to a remarkable degree, raising questions about how the exposure is managed. But the bigger, immediate problem is this:
As you can see, the ETF exploded in size in December — mostly ahead of a SpaceX funding round that valued the company at $800bn. SpaceX was then valued at $1tn in the combination with xAI earlier this month. Alphaville understands that the ETF bought additional SpaceX stock after these monster inflows to get its exposure back to target. And someone has now just yanked over $600mn back out of the ETF, deflating its assets back to just $482mn.
That chart pattern will be very familiar to many FTAV readers, with uncanny parallels with what we saw in ARK Invest’s suite of ETFs ahead of the IPOs of Figma, Bullish and Klarna last year.
Essentially, traders were able to use the unique ETF mechanism to create shares in the funds ahead of a money-spinning event, try to capture the windfall, and then yanked their money out again.
FT Alphaville spoke with Joel Shulman, the CEO and chief investment officer at ERShares, and this is exactly what he thinks happened this time as well — except in this case it was the expected big revaluation of the SpaceX stake that was the trigger, rather than an IPO:
It’s just hot money . . . In just eight trading days [in December] we got 7-10 major orders of hundreds of millions of dollars . . . They’re arbitrageurs coming in for a quick buck. I knew it when they came in . . . The so-called ‘smart money’ has now left.
They do this, they swoop in and go out. We’ve seen this a few times . . . They were hoping to get a quick pop.
More worryingly for the ETF and its remaining investors, this has now ballooned the relative size of the SpaceX stake in the fund to over 44 per cent as of the end of Thursday — far above the 15 per cent cap permitted by US financial regulations.
The US Securities and Exchange Commission last year in practice scrapped this requirement for closed-end funds, but as far as Alphaville understands it is still very much the rule for open-ended funds like ETFs.
Technically, the rule stipulates a 15 per cent limit to “illiquid” holdings, which is typically defined as something that a fund cannot reasonably expect to be sold in seven calendar days at its current price. If a fund exceeds that cap, the breach must be reported to the board and a plan must be presented to quickly bring the share down below 15 per cent.
As MainFT’s Steve Johnson reported earlier this month, XOVR and a similar ETF from Baron Capital had already breached the 15 per cent cap, but the Baron argued that shares in very large private companies like SpaceX were only “less liquid” rather than “illiquid”, and therefore the 15 per cent level didn’t apply.
In normal times, we would confidently predict that regulators would laugh at this argument, before going for the jugular. In 2023 the SEC went after a firm for exactly this kind of “less liquid” argument, arguing that:
The Liquidity Rule provides substantive protections to shareholders of open-end funds. Trustees must exercise oversight on behalf of shareholder interests, and the Commission will hold trustees accountable when they fail to fulfil the most basic requirements under the applicable rules.
But, well, these aren’t normal times for financial regulation. Last year, the new-look Paul Atkins SEC dropped that case.
Coupled with its general deregulatory vibe and the scrapping of the closed-end fund restrictions, this has understandably encouraged a lot of . . . creative exploration of private assets in open-ended fund structures like ETFs.
Still, this isn’t a mild breach of the rule. Almost half of a publicly traded, open-ended fund now consists of a stake in a single private company. And even if the SEC decides to sit on its hands, investors might naturally take fright at that.
After all, any further outflows will force XOVR to sell more of its remaining public stock, swelling SpaceX’s relative size further. Market-makers will have trouble creating and redeeming shares when such a large part of the ETF now consists of a single private company.
At some point we could even conceivably face the almost unprecedented prospect of an ETF actually having to suspend share creations, or seek permission to halt redemptions entirely.
Morningstar’s Jeffrey Ptak was scathing in a report this morning, arguing that the situation calls ERShares’ risk management and oversight practices into doubt “to a disqualifying degree”:
We’re crossing a Rubicon here. While there have been some analogues — for instance, Russia stock ETFs went into suspended animation when that country invaded Ukraine — we really haven’t seen an ETF this large get this overweight in an illiquid security before.
What happens next hinges largely on two factors: flows and the manager’s ability to reduce the SpaceX SPV stake.
If investors continue to bail from the ETF, it will only further ratchet up the pressure by increasing its weight in the illiquid asset. This is the risk of stuffing a daily liquidity vehicle — an ETF — with an asset that doesn’t trade, playing out vividly, in real time.
Correspondingly, if the manager is unable to sell at least a portion of the SpaceX SPV stake, the problem could fester. The best outcome under that scenario is some combination of positive inflows to the ETF and strong performance from the common stocks in the public stock sleeve, as that would help to bring the SPV’s weight down.
Shulman bristles at much of Ptak’s analysis, arguing that “personal shots cross a line”. He says he is planning to respond to “fundamental flaws” in the Morningstar analyst’s work.
However, while the ballooning SpaceX stake is problematic from a regulatory perspective, Shulman says ERShares has been in touch with the SEC and that the regulator has been understanding.
We’re playing by the rules. We’ve discussed our plan with the SEC, and we assume they don’t want to harm shareholders. We’re confident that if we were forced to sell we’d easily be able to do it. But we don’t want to . . . We assume they understand what’s going on.*
In fact, Shulman argues that the huge relative size of SpaceX actually makes XOVR more attractive to many investors — more undiluted SpaceX exposure could be just what they want.
Moreover, SpaceX is a giant, hot company with shares not infrequently trading on private markets and semi-regular funding rounds, and it might go public sometime in 2026. So it’s entirely possible that XOVR would be able to trim its stake if forced to. And with the current SEC unlikely to force the issue, perhaps the ETF can even happily trundle on with SpaceX at a massive, rule-busting size until there is an IPO.
Even before then Investors inflows and appreciation in XOVR’s public stock positions could organically deflate SpaceX’s relative size in the portfolio over time. So it will probably want to avoid dramatic action, as Ptak also noted:
We wouldn’t expect ERShares Private-Public Crossover ETF’s board to suspend creations, effectively closing the ETF to new investments. That would shut off one of the few avenues to lowering the SpaceX SPV’s weight and could cause the ETF to trade at a lofty premium to NAV, like a closed-end fund. It seems even less likely that the ETF’s manager and board would seek to gate the fund (subject to the SEC’s approval of such a request) to prevent further redemptions.
Instead, the likeliest path forward seems to be a kind of muddling along. If the manager can bring the SpaceX SPV weight under control, then the ETF should function more or less without disruption.
To Alphaville it still looks like a very volatile situation that could easily go haywire. But Shulman says that investors should remain calm: “We’re not panicking here, and neither should shareholders. They’re going to do just great.”
*Slightly tweaked to clarify the conversation.