MOON - Lessons From MOON's Collapse

Summary

• MOON is an innovation growth index ETF.
• MOON is down almost 50% since inception, in late 2021.
• A look at the reasons, and some possible lessons, from MOON's collapse.

I last covered the Direxion Moonshot Innovators ETF ( MOON ), an index ETF meant to provide investors with exposure to the most innovative U.S. companies, in late 2021. In that article, I argued that MOON's strategy was incredibly ineffective, and losses likely. MOON is down over 50% since, significantly underperforming relative to most indexes, and to my own (somewhat low) expectations.

Thought to do a quick article looking at some of the reasons, and lessons, of MOON's collapse. Two stand out.

MOON was invested in companies with sky-high valuations. Prices dropped to more sustainable levels in 2022, and MOON saw sizable lessons. Fundamentals and valuations matter, sooner or later.

MOON's index was quite narrow, and focused on companies with lots of innovation buzzwords in their filings. A broader, diversified index fund with a more sensible index would have seen lower losses. Index rules and methodologies matter too.

So, don't invest in overvalued equities or in funds with subpar indexes. Seems simple enough.

MOON - Quick Overview

MOON is an index ETF tracking the S&P Kensho Moonshots Index . Said index aims to invest in the 50 most innovative U.S. companies. Selections are made on the basis of R&D expenses as a percentage of revenues, and on the frequency of innovation buzzwords in company filings. Companies with more uses of words like innovation, groundbreaking, and novel, are likelier to be included in the index.

MOON does invest in very innovative, cutting-edge industries and companies, including genetic engineer, self-driving vehicles, and 3D printing. Largest of these are as follows.

MOON's performance has been disastrous, with the fund down almost 50% since inception. MOON has significantly underperformed most relevant equity indexes, and my two preferred innovation ETFs, the Goldman Sachs Innovate Equity ETF ( GINN ) and the BlackRock Future Tech ETF ( BTEK ).

Disastrous results. Let's have a look as to their causes, and some possible lessons.

MOON - Lessons from its Collapse

Fundamentals and Valuations Matter

MOON invests in innovative growth companies. Most of the fund's holdings are smaller, less well-known companies, but investors should think of companies like Tesla ( TSLA ), Zoom ( ZM ), and Crispr ( CRSP ), as representative of the fund.

MOON's holdings were generally growth companies with outstanding revenue growth, sky-high valuations, and no profits. These companies saw skyrocketing share prices from early 2020 to mid-2021, as investors piled on tech, growth, and similar market segments during the pandemic. MOON was created in late 2021 so missed most of these gains, but looking at similar funds clearly show what happened.

As share prices increased so did valuations, and these soon reached exaggerated, excessive levels. Although specific data is missing, from looking at previous coverage, it seems that PS ratios hovered in the 50s, some reached the triple-digits. PE ratios were consistently negative. PB ratios stratospheric. Companies were valued on total addressable market (TAMs), hopes and dreams.

Valuations for this market segment were unsustainably high. They were bound to decrease, sooner or later.

Valuations started to come down in late 2021, and went crashing down in early 2022, as skyrocketing inflation led to rapidly increasing interest rates. Investor sentiment changed, and many investors pivoted from growth to value, commodities, energy, and short-term bonds.

MOON crashed because its valuation was unsustainably high. The lesson is simple. Fundamentals and valuations matter. Ignore them at your peril.

Indexes Matter

MOON is an index fund, so its strategy, holdings and performance are all strongly dependent on its underlying index, which is not a very good one. At least I don't think so.

As mentioned previously, MOON takes into consideration the relative frequency of innovation buzzwords in company filings when making investment decisions. I went through some of the details and issues of doing so here , but the situation seems self-evidently absurd to me. Portfolios should be created considering fundamental metrics, perhaps momentum and trading signals, as well as diversification and concentration (as risk-reduction measures). Buzzwords in company filings are not an important consideration, and their inclusion in an index should lead to losses and underperformance, all else equal.

In this particular market niche, an index fund like the Goldman Sachs Innovate Equity ETF tracks a more standard, broad-based, diversified innovation growth index. GINN's index was instrumental in reducing losses and underperformance for the fund since late 2021, although these were still quite hefty.

Innovation funds with sensible indexes, including GINN, outperformed MOON. Indexes matter, and investors should always consider these when investing in index funds. As an aside, this is why I almost always start my index fund articles with an analysis of the index. Indexes are key, and a close look at these is always warranted. Most indexes are fine, some are not, and you can (sometimes) differentiate between them, so it's always important to check.

Conclusion

MOON significantly underperformed these past few months due to investing in overvalued companies, and due to a subpar index. Losses could have been avoided by taking a closer look at fundamentals and valuations, as well as improving index design so as to increase diversification and reduce risk.

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