Fractional Sports Card Investing: A Collector’s Guide
I’ve always viewed sports cards as an alternative asset. Vintage sports cards are equivalents to your other stocks, bonds, or mutual funds.
Some view baseball cards as pieces of cardboard. But once you dig into the supply/demand dynamics, it is clear why sports cards should be considered investments.
Don’t get me wrong, I’ve always been in this first as a collector. I agree that the popularity of breakers and flippers gives rise to a bubble-like, greed-infested hobby.
But I also think it’s fine to be both a collector (in it for the love of the hobby) and an investor at the same time.
Yet, with many vintage sports cards out of budget for most collectors, a new stock market-like dynamic has evolved.
Fractional sports card ownership allows a collector to buy a small piece of a high-priced card at whatever amount they desire.
In this piece, we will dive into the details of this burgeoning new market.
What Is Fractional Sports Card Ownership?
Fractional Sports Card ownership brings the idea of stock investing to the sports collectibles market.
Companies such as Collectable and Rally take a high-priced sports card and 'securitize' it, creating shares in the card.
Like a stock, fractional sports card shares allow you to own a piece of a prized collectible. And at a fraction of the value of the card.
A company such as Collectable either acquires the card or works with a consignor to create an offering.
Once they buy the card, they work to 'securitize' the collectible. This is all fancy speak for taking care of all the legal stuff to create an offering where investors can buy shares in the card.
How Can A Sports Card Get Divided Into Shares?
Once the offering (also known as an IPO or Initial Public Offering) is set, the company will alert the public of the offering.
A typical IPO on the Collectable app comes out at either $5 or $10 per share but can vary among providers. The issue is often also referred to as the Primary Market.
I read through the SEC filings for the issued cards to get some more details on the offerings at Collectable.
Based on the SEC filings,Collectable Sports Assets LLC works with Dalmore Group LLC, a broker-dealer, which helps facilitate the transactions. The listings are qualified with the SEC under Regulation A+.
Collectable breaks down all the costs and fees associated with the listings. It surprised me with the size of fees for each item. Here is the breakdown of the 52 Topps PSA 7 Mantle.
In this case, Collectable is working with a consignor and they established an initial price of $425,000 for the Mantle.
They also are providing the consignor with a retained interest in the card. In this case, it is 40% ($170,000), meaning the retained value of the card is $255,000, which we can see in the table below as the cash portion of the asset.
But, note there are an additional $30,000 in fees ascribed to this deal.
Thus, when they come to market with the offering, in this case, the initial $425,000 value would include another $30,000 or 7% in fees.
So, for example, when you go to Collectable, and you see a new IPO listed for $10, just realize that 70 cents of each share is going to line the pockets of Collectable, its lawyers, broker dealers, and its service providers.
Look, I understand that these fractional sports card companies are providing a service for collectors in order to access these highly valuable cards at a fraction of the cost, but the fees seem a bit excessive to me.
A Review Of The Collectable App
As noted before, Collectable App is the largest fractional sports card player on the market. I signed up with Collectable to try it out. The app is smooth and the terms are quite clear.
The company was founded by Ezra Levine, a 33 year old University of Michigan grad with a background in investing.
For an IPO, you will need to submit your interest to Collectable, indicating how many shares you would like to buy. Not everyone will be assigned the shares they request, especially if there is a lot of demand for a certain IPO.
There is an initial lock up period (usually 60-90 days) where the shares cannot be sold. After that investors can purchase shares on the secondary market.
I tried to buy some shares on the secondary market at Collectable. The 1948 Leaf Babe Ruth SGC 8 which is down about 18% since its IPO last October looked interesting.
One thing I will first point out is that Collectable priced the card at a value of $50,000 in November 2021. Two PSA 8 Ruth's had sold a few months prior for $46,800 and $50,400.
But the Collectable Ruth baseball card does have better centering as they point out in the listing. Although we all know that SGC graded cards do tend to sell at a sizeable discount.
I was mostly taken aback by the huge spread between what is the Bid and the Ask price of the Ruth (shown below) in the secondary market. (a primer if you don't know what Bid/Ask means).
Collectable also offers some good reference information on its website:
A ‘Bid’ signals intent to buy an asset at a certain price. An ‘Ask’ signals intent to sell an asset at a certain price.
Bid and Ask orders are limit orders. When you place an order for an asset, you will need to input a price and quantity.
This says that if I want to buy today, I'm paying $4.70 (the lowest Ask) and if I want to sell today, I can sell at $4.06.
Thus, this is indicative of a very illiquid market. Let's say I bought in today and changed my mind tomorrow. Assuming the market didn't change much, I'd be out roughly 21%.
I should also note that Collectable is also charging a 1% fee on the purchase in the secondary market and a 1% fee to sell in the secondary market. They claim this is going to Templum Markets Brokerage which facilitates the trading, but I'm sure Collectable gets a cut.
Side Note: Anyone want to go into business with me? This seems to be highly profitable business model.
A Review of Rally - Fractional Investing
I also opened up an account with Rally (sometimes known as Rally Rd). To my pleasant surprise, upon visiting the site, I was gifted a $7 fractional share of a Mutant Ape Yacht Club NFT. I know nothing about this NFT, but it was officially my first NFT purchase, albeit via fractional investment.
Not only can you buy fractional ownership of sports cards and memorabilia, NFT's, but Rally also offers a fractional ownership platform offering rare whiskey, luxury cars, rare wines and old vintage books.
I found that Rally offers some really cool and obscure items. They have a T206 Wagner which has nearly quadrupled since its offering.
I also did notice the same sort of massive spread between the bid and ask price. But I guess if you pick the right asset, the spread shouldn't matter too much--the increase in value of the T206 Wagner is a good example of this.
One thing I didn't like about the Rally website - they aren't all that transparent on the details of some of their memorabilia. For example, I had to dig into the offerings to find out that the Wagner was trimmed and covered in shellac, something I couldn't first see from their small photos.
What Is A Secondary Trading Market?
As mentioned earlier, fractional sports card platforms come to market with a new IPO offering for a high priced sports card or piece of sports memorabilia.
The offerings are set at an established price per share, equating to what is known as total market capitalization (or Market Cap).
Sixty Days following the IPO offering, the card or collectible can be traded on a secondary market.
This provides existing IPO holders the ability to sell their share or for collectors to come in and purchase shares of a card or piece of memorabilia they are interested in.
In the case of Collectable they offer continuous trading daily, Monday through Friday from 9:30pm to 4pm, the same exact hours of the US stock market exchanges.
Can Fractional Sports Card Assets Get Acquired?
In the terms of Collectable, there have been many successful acquisitions, leading to nice profits for shareholders.
On the app, there is a section that allows a potential buyer to make an offer on an item.
Once Collectable recieves any offer they deem as worthy, they poll shareholders of to determine if they want to sell the item.
If the decision is made to sell, the proceeds will be paid out pro-rata to each shareholder.
Here's a Tom Brady rookie card that recieved a sizeable offer but was ultimately declined by shareholders. They even god Jerod Mayo to deliver a video with the results of the vote!
How Have Fractional Sports Card IPO's Performed?
As for Collectable, which has only been trading since November of 2020, the results have been a mixed bag. The Collectable Index, which measures all 168 IPO releases has produced an average return of only 3.1%, well short of the S&P 500 equity index which is up nearly 40% over the same period.
They have had some big winners. For example, their most successful release - a 2018 Josh Allen Gold Refractor card is up over 300%.
But also a lot of losers and many offerings on their secondary market that are now trading for under $10 per share.
Case in point, a basket of Derek Jeter SP Foil cards that IPO'd for $10 per share and are now at $2.80, down over 70%. Several Luka Doncic cards issued at the peak of the market are now well under water.
What Are The Major Risks To Fractional Sports Card Investing?
To me, the biggest risks of fractional card investing are the hidden fees that aren't clearly communicated to investors. I had to dig into SEC filings to determine that many of Collectable's offerings have roughly 7% embedded fees. This does not include the 1% buying and 1% selling fees involved.
Also, there is a significant lack of liquidity, leading to massive bid/ask spreads for the cards. Thus, anyone buying fractional sports card shares must do so with plans of holding the investment for the long term (3+ years minimum).
Anyone hoping to flip in the short term is likely going to be eaten up by all the fees and lack of liquidity.
Should I Invest In Fractional Sports Cards
The fractional sports card market is intriguing.
It's the stock market, but with sports cards.
Collectors can now buy a piece of a 52 Topps Mantle or a T206 Wagner, like buying a share of Costco.
The market is evolving and while there are only a few players in the space, I expect new competitors to arrive.
My hope is that newer entrants can improve upon some of the high fees and liquidity issues.
For anyone looking to experiment, it's at least worthy of a few bucks that you can afford to lose.
Like anything, try to diversify your investments across different cards.
If you have any experience with fractional card investing please shoot me an email at firstname.lastname@example.org