SPACs have surpassed IPOs in volume this year, and many advocate them as a new asset class that every investor should add to their portfolio, purporting that they generate superior returns and diversification benefits. But an article in CFA Institute’s Enterprising Investor column poses the question if these benefits are real or an illusion.

Special-purpose acquisition companies (SPACs) are securities that allow investors to aggregate their money in funds that then wait to identify companies to buy and take public. The period while the SPAC is choosing potential targets is its “pre-deal” phase. Once the company is purchased and gone public, that becomes the “post-deal” phase of the SPAC.

Analyzing the full sample of SPACs going back to November 2020 with the CNBC SPAC 50 serving as the index, the comparison revealed that the SPAC 50 pre-deal underperformed the SPAC 50 post-deal by about 5%. Both indexes exhibited more volatility than every other major index.

As for the diversification benefits, the analysis saw that pre-deal SPACs average a correlation coefficient of 0.43 with major stock indexes. But once those SPACs went public, the correlation coefficient rocketed up to 0.53, suggesting that while SPACs might offer some diversification benefits during the pre-deal phase, those benefits decrease significantly after the deal is done.

The analysis contends that the claim that SPACs are an uncorrelated asset class in the same realm of public equities is unsubstantiated, and can’t offer the same kind of benefits as the standard total bond index. If portfolio diversification is the goal, the article concludes, SPACs don’t seem to be the best option.