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Will the Rise to New Heights in 2021?

January 26, 2021 Author: Michael Laitkep Summary

• Following on the success of the International (ISS) resupply program, NASA has continued to partner with commercial space companies, including SpaceX and (BA), for the development of crewed to transport to the ISS and for use in future missions. • The S-Network Space Index (SPACE), linked to the Procure Space ETF (UFO), provides exposure to companies substantially engaged in space activities across multiple sectors. • As new space technologies and activities multiply, the economic impact is likely to be significant, creating new jobs and that improve our way of .

Space has emerged as a new frontier for the economy. In recent years, efforts by billionaires like , , and have sought to advance commercial and , while NASA has embarked on unprecedented partnerships with private companies to resupply the International Space Station (ISS) and develop fit for . These trends have been the most visible, but the needs of the growing space economy have proven diverse, with growth in space activities ranging from spacecraft manufacturing to operation and related services. This note provides a broad overview of the space industry, explains how the commercialization of space has accelerated in recent years, and discusses how investors can gain exposure to this industry.

Commercial space activities began with .

The commercialization of space began in the 1960s with the launch of the first satellites by private companies, which were used for communications purposes. Satellites have a variety of uses that are relevant across industries, including for communications, science, defense, and . On the commercial side, satellites are commonly used by telecommunications and technology companies to provide internet and phone service, and radio, navigation, and many other uses. Larger and more complex satellites have mostly been the domain of and occasionally well-established companies, but as launch costs have declined for commercial rockets as a result of spacecraft reusability, improved manufacturing methods, and , new startups have emerged that focus on creating small, innovative satellites for a specific commercial use case, such as emergency communications, internet of things connectivity, or rural internet access. On Sunday morning, SpaceX launched Transporter-1, its first dedicated rideshare mission on the to deploy a record-breaking 133 small satellites for commercial and customers, along with 10 of SpaceX’s own Starlink satellites. Advances in technology and more affordable launch costs make satellites an intriguing area for future space-related growth.

Commercial spaceflight is a fast-growing portion of the space industry.

In contrast to satellite operation, commercial spaceflight is a relatively new phenomenon as governments initially took control of transporting people and into space. Government investment in space accelerated in middle of the 20th century during the as the US and the competed to launch satellites and send the first people to the . While some private companies successfully launched rockets in the 1980s and 1990s, investment has inflected more recently. As the program came to a close, NASA sought to increase its partnership with private companies to reduce costs and facilitate safe and reliable access to the International Space Station (ISS) and low Earth . In 2006, SpaceX and Orbital Sciences received contracts from NASA to deliver cargo and crew to the ISS. SpaceX became the first commercial space company to deliver cargo to the ISS in May 2012 with the reusable Falcon 9 rocket and Dragon capsule, while Orbital Sciences1 completed its first resupply mission in September 2013.

1 // Successor company Orbital ATK was acquired by (NOC) in June 2018. 1 Following on the success of the ISS resupply program, NASA has continued to partner with commercial space companies, including SpaceX and Boeing (BA), for the development of crewed spacecraft to transport astronauts to the ISS and beyond. In November, SpaceX launched the first crewed mission to the ISS and expects a total of three human to the ISS over 2020 and 2021. The company continues to develop and test reusable rockets with the goal of eventually reaching . Boeing plans to test its Starliner spacecraft in March and hopes to perform its first crewed mission to the ISS in late 2021.

Commercial spaceflight has also seen a boost from the emerging space tourism business, which involves taking people into space recreationally. , owned by Amazon founder Jeff Bezos, is reportedly seeking to launch the first human flight on its rocket around early April if upcoming test flights are successful. Once completed, the first flights with tourist passengers would begin shortly thereafter. In the second half of 2021, is partnering with SpaceX to transport a private crew to the ISS for the first time. (SPCE) has perhaps the most ambitious space tourism plans as it targets flying thousands of people to space on 400 flights per year. While SPCE failed to reach space on a December test flight of its VSS Unity , the company remains focused on its remaining test flights and ensuring commercial viability. As of 3Q20, SPCE possessed a pool of about 600 future customers at a cost of around $250,000 per person.

How do investors gain exposure to space?

The S-Network Space Index (SPACE), linked to the Procure Space ETF (UFO), provides exposure to companies substantially engaged in space activities across multiple sectors and takes a pure-play approach by weighting 80% of the index to companies with at least 50% (but typically 100%) annual revenue exposure to space- related activities. The index is comprised of two primary segments, Satellite Operators and Hardware. The Satellite Operators segment includes companies that own, operate, or utilize satellites to provide services, while Hardware includes companies involved in the sale of space-related hardware. These segments can be further broken down into specific space business activities, including: prime manufacturer2 of satellites, prime manufacturer of launch vehicles, satellite operator, space vehicle component manufacturer, and manufacturer of ground equipment dependent upon satellite systems. The table below provides an overview of the top 10 constituents of SPACE.

2 // Refers to the contractor responsible for managing subcontractors and delivering the product to the customer. 2 While many of these constituents may be unfamiliar, they are playing a key role in the space economy. In December, a SpaceX Falcon 9 rocket delivered an SXM-7 digital audio radio satellite constructed by Maxar Technologies (MAXR) for customer SiriusXM (SIRI) as part of its fleet of satellites providing radio service. Earlier in January, Viasat (VSAT) announced that Delta Air Lines (DAL) had selected the company’s Ka-band satellite in-flight internet technology for more than 300 aircraft, including both new delivery and system upgrades on existing airplanes. Multiple European spacecraft manufacturers and satellite operators formed a consortium that was recently commissioned by the EU to study the potential for an EU-owned space-based communication system, leveraging the consortium’s experience in operating satellites with a variety of commercial uses such as television broadcasting, broadband internet, and mobile communications. Several companies in the consortium (or their owners) are also constituents of SPACE: Airbus (AIR FP), Eutelsat (ETL FP), Leonardo (LDO IM), Thales (HO FP), and SES (SESG FP). Importantly, significant space names like Virgin Galactic (SPCE), Boeing (BA), and Northrop Grumman (NOC) fall outside of the top 10 but are included in the index. From construction of space vehicles to the operation of satellites and the provision of related services, SPACE constituents are contributing to the new space economy.

Space is an attractive opportunity for exposure to emerging and future trends.

Space is popularly known as the final frontier, and despite the advances of the last 60+ years, it is clear that there is significant still to be made in developing a full-fledged space economy. Estimates by Morgan Stanley suggest that the space industry could grow from $350 billion in 2016 to more than $1 trillion by 2040. This increasing investment is likely to encompass the full range of space activities, from manufacturing to infrastructure to services. In addition to including current space companies, SPACE’s methodology allows for the inclusion of companies participating in space trends expected to be prevalent in the future such as and infrastructure, space resource exploration and extraction, space-based military and defense systems, space tourism, and enabling technologies. As new space technologies and activities multiply, the economic impact is likely to be significant, creating new jobs and that improve our way of life.

SPACE is the underlying index for the Procure Space ETF (UFO).

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