What happened

There's a new space-focused exchange-traded fund (ETF) coming from one of the hottest names in investing, and that has led to a lot of investor speculation about what stocks are likely to be included.

That speculation has a number of stocks rocketing higher on Tuesday, with shares of AeroVironment (NASDAQ:AVAV), Stable Road Acquisition (NASDAQ:SRAC), and New Providence Acquisition (NASDAQ:NPA) all up more than 10% apiece.

So what

Last week space stocks jumped higher after Cathie Wood's Ark Invest announced plans to launch an ETF focused on space. Few investment firms can match the ARK Innovation (NYSEMKT:ARKK) fund's 170% return in 2020, and investors are keenly focused on what Ark plans to do next.

Ark Invest filed to operate "Space Exploration ETF" under the ticker ARKX. Space is a high-risk, high-reward area where when companies fail they can fail spectacularly, so there is some logic to investing in a basket of names in an ETF instead of putting all your money in one stock. The issue is there are very few publicly traded companies focused solely on space, meaning Ark might have to get creative to fill out the ETF.

Illustration of three side-by-side ballistic launches.

Image source: Getty Images.

AeroVironment would be a creative choice. The company is primarily a dronemaker, but has dabbled in space, including building a helicopter drone for NASA that if all goes well will fly over Mars this year. AeroVironment primarily builds drones for the Pentagon. But given that most companies involved in space are also defense contractors, AeroVironment fits the bill for the ETF as well or better than many likely participants.

Stable Road and New Providence have more direct connections to space. Both are special purpose acquisition companies, or SPACs, that are set to merge with space-focused privately held companies. Stable Road is in the process of finalizing a deal that would bring Momentus public. Think of Momentus as a company building a space tow truck: Its spacecraft will have the ability to move satellites and other objects into new orbits.

New Providence, meanwhile, has a deal in place to merge with AST & Science, a company attempting to deliver broadband-speed internet to smartphones via satellites.

Now what

It's a dangerous moment for investors in these stocks. As said above, given the risks and uncertainty an ETF strategy for space makes a lot of sense. But the attention around Ark's plans is causing a number of stocks to shoot higher.

Of these three, AeroVironment is by far the best stand-alone investment. The company is still a relatively small player in the drone business, but it has found success as a Pentagon contractor. Space revenue, and the ETF talk, is icing on the cake.

As for the other two, even assuming the SPAC mergers close as planned, Momentus and AST are two early-stage companies with a lot to prove, and a lot that can go wrong. As short-term trading instruments the stocks could well ride the wave of excitement around space, but for long-term investors, an ETF, and not individual ownership, is the best way for now to gain exposure to these companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.