Speaker 1:
From the library of the New York Stock Exchange, at the corner of Wall and Broad Streets, in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE and indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome Inside the ICE House.
Pete Asch:
Welcome Inside the ICE House. I'm your host Pete Asch. I must admit I was up late last night. Me, being a huge soccer fan, could not turn off the ESPN and Fox Sports branded MLS is Back Tournament, especially given the sports deprived times we've found ourselves in due to COVID-19. Over the past few months, live entertainment demand has been high and the supply has never been lower. And it's not just me, in the world of digital content, live sports dominate the ratings and garner growing shares of advertising dollars. Soccer is now the fourth most watched sport in the United States. And if you look beyond the domestic market, it is the largest sport with the most recognized teams and athletes, by far, across the globe. Soccer with an endless source of live entertainment from dozens of leagues competing for the eyeballs of an established base of global consumers, combined with a clear open plane for growth here in the United States is far from over bought. Unfortunately, with a few notable exceptions, like Manchester United, that's NYSE ticker, MANU, there are few ways to invest in the beautiful game.
Pete Asch:
That brings us to our guests today. Roundhill Investments CEO and co-founder, Will Hershey, who saw all the same playbook happening in another sport filled with lots of public companies that, by the numbers though he would caution us is not quite apples to apples, is already larger on the global scale than American football. And like soccer is only starting to make inroads in the American market. In 2019, his firm launched Roundhill BITKRAFT Esports & Digital Entertainment ETF. That's NYSEARCA ticker NERD, or nerd, to allow investors to gain exposure to this growing collection of competitions, leagues and the technology driving them.
Pete Asch:
The return of sports has also injected life and in action into sports betting, now legal in almost half the states in the country and across the globe. But don't worry, Roundhill Investments has that covered as well with Roundhill Sports Betting & iGaming ETF. That is NYSEARCA ticker BETZ, or bets. Our conversation with Will on online gaming, eSports and how Roundhill Investments created ETFs to capture the potential growth in these spaces, will be coming up next.
Speaker 3:
In our time of greatest need, we want to thank the true heroes around the world for stepping up, for taking care of us and keeping us safe. With your expertise, your commitment, your sacrifice, and your selflessness, we'll work together to create a brighter future. And we thank you for reminding us what really matters. From all of us, thank you.
Pete Asch:
Our guest today, Will Hershey, is the CEO and co-founder of Roundhill Investments. Before founding Roundhill in 2018, he served as the head trader for Yorkville Capital Management. Prior to that role, he was with Yorkville ETF Advisors, where he was instrumental in the creation and growth of two NYSE listed ETFs. Welcome Inside the ICE House, Will.
Will Hershey:
Thanks, Pete. Great to be here.
Pete Asch:
So we've been starting all of our podcasts asking our guests how them and their companies transitioned to remote work. But Roundhill Investments was already fully remote before this began, so is that a result of being still in the startup phase, or a decision you'd like to run the company long term?
Will Hershey:
That's a great question. I think it's probably more being in the startup phase, but also being two young guys that started a business. It just so happens to be in financial services, but I think we have an approach that... Look, as we continue to grow, as we bring more people on board, we're going to hire the best people wherever they happen to be. And look, we're doing this remotely right now. You can really be efficient no matter what market you're in, whether you're even trading. We had the floor of the exchange closed for, I don't know, a couple months, and things went seamlessly. I think it's just the way the world is right now. And don't want to bash commercial real estate, but I think it might be the way things go for the next few years.
Pete Asch:
But Roundhill did launch an ETF into the remote economy. Did the pandemic play a role in both the timing of when the launch was? Were there any difficulties to get approval with offices shuttered?
Will Hershey:
You're referring to the Sports Betting & iGaming Fund that we launched in just the beginning of last month, the beginning of June. And it's interesting because we started the process for filing that fund in March. We started coming up with the concept and the index underlying the fund in the beginning of the year. Then, as we're going through this process with life as normal, March happens and there's no sports on TV, and we're getting calls like, "Hey, do you still want to go forward and launch this fund?" And we're like, "Yes, this is a long term story. We believe sports will come back." And really, the timing I think, in a lot of ways, was really fortuitous. But clearly in an ideal world, at least in our minds, we would've launched with sports being on. But the fact that we're capturing this shift from physical to digital, that also plays into our other fund as well, really is something that we're big believers in over the long term.
Pete Asch:
And even with no traditional sports going, there are a lot of things going on in the betting world. There were a number of states legalizing sports betting. Draft Kings went public. Penn National Game bought a stake in Barstool Sports. When did you first realize though, ahead of this, that this would be the thematic of your second ETF?
Will Hershey:
We had been working on the concept for the product dating back to the beginning of this year, the beginning of 2020. But the Draft Kings going public, that you mentioned, really was that seminal moment for us. When draft Kings was acquired by a SPAC, merged with SBTech to create the first, in the US anyways, true online focus, pure play, sports book and iGaming company. And for us, having Draft Kings out there as a cornerstone for what would soon become the index construction, and then the ETF construction, to us really, really is important. Because I think, at the end of the day, investors in an ETF are buying in the underlying companies. And having Draft Kings in there really allowed for us to tell a story that was more US-centric.
Will Hershey:
I think a lot of the companies that are in the portfolio that have been public for a longer period of time are outside of the US, even though they're doing some really interesting things, especially in the world of iGaming. Having those companies in an ETF that people recognize, they understand, they've seen the Draft Kings' commercials helps just from a marketing standpoint, but also helps make it a better product, make it a more pure play product, which is what we're always going to try and achieve.
Pete Asch:
You mentioned a lot of the companies are outside of the US. Do you think that's why there were not other ETFs in this space? Or do you think some of the larger firms are still a little bit struggling in combining betting and equities?
Will Hershey:
I think it might be the latter. But really, I think what we're always going to try and do with our funds is really not be early, because you never want to be early to a trade or a theme, but really capture the inflection points in given markets. And we had seen regulatory momentum over the past couple years, starting with New Jersey, which has really been at the forefront of legalized sports betting and now iGaming, which is online casino for those that maybe aren't so familiar. So really, it's more the fact that I think we tend to be on the cutting edge when we look at putting products out there. I think when we put out eSports, our Esports Fund last year, that was maybe a little bit new of a concept to the North American market, huge in Korea and China.
Will Hershey:
So that's the way we're going to approach it. And just going back to your earlier question, or point you made, of people betting on different things while traditional sports or sidelined. Esports betting has totally taken off. And I think betters are going to bet, and they're betting on League of Legends, and they're betting on Counterstrike, just like they were betting on the NBA. And the other crazy little niche that's developed, and I don't know if that one's here to stay, but is Eastern European Table Tennis was what had the betting world going crazy because why not?
Pete Asch:
Hey, I mean, if you need to find the action, you'll find it wherever you can get it. How was the early assets of management for BETZ going? Has it been what you expected?
Will Hershey:
I would be lying if I said I expected it to grow this quickly. So maybe not surprised at the amount of assets. Were sitting at around 90 million in assets under management right now. But really, the speed with which it came out the gate in the first couple weeks, and really got to that amount. To give you a little bit more context there, the ETF, and from my experience in ETFs, I'd never seen this. The ETF had something like 125 creation units in a single day, each of 25,000 shares. So we had about $50 million in assets come in, effectively in a single day. And I had never experienced that in my time previously launching ETFs. And I think a lot of it was right place, right time. We talked about people really emotionally being attached to the return of sports.
Will Hershey:
How do I invest in what I'm believing in that's going to happen, and then benefiting from that financially? I think it really played into that. And anecdotally what we saw on Robinhood, which everyone loves to talk about nowadays, I think that whole story is overblown in terms of their impact on the market. Nonetheless, we had about 20,000 holders on Robinhood for BETZ within the first couple weeks, which I think speaks to really connecting with a younger investor base, younger demographic. That we're going to try and go after with our funds, because we think it's really an area that's potentially being underserved by other broader ETF issuers.
Pete Asch:
So we're talking a little bit about your experience in ETFs. How did your experience with Yorkville creating traditional MLP ETFs and trading them prepare you to run your own firm?
Will Hershey:
I think it taught me a lot of what I wanted to do, and a lot of what I didn't want do. The didn't want do was pretty clear. Most recently, I was the head trader with Yorkville for a long short MLP hedge fund, and didn't really see pipeline assets, as what I believed in as a relatively younger guy, as the way of the future. So that was going to be a no for me. But what I really did learn was we were a small team back then, and we were able to grow ETF assets under management to 400 million in our two funds. And really got to understand the ETF business model. How indexes are created. How ETFs are marketed. Because, at the end of the day, really the ETF business, if you're talking about passive management anyway, which is what our funds are, is really that of a storytelling and marketing business.
Will Hershey:
How do you tell people that this product makes sense as a part of their portfolio? And how do you reach a broad audience in doing so? I think I learned a lot of that from my time there. I was a trader too, and that was like you could see the writing on the wall that, that became a little bit more glorified button pressing. Am I really having that much of an impact? And said I got together with my, now, co-founder and I said, "Look, I think ETFs are a great scalable vehicle that can make a lot of economic sense for us, and can make a lot of sense for people in their portfolios." Even though there's thousands of them, many of which are listed with you guys, there's room for differentiation, and there's room for connecting with an audience in a really different way. And I think that's one thing we've really taken to, is getting in front of a younger audience by making ETFs relatable, and telling the stories on platforms they're familiar with, like a Twitter, or like via our blog posts and things of that nature.
Pete Asch:
As you mentioned, the good story. So when you're telling the story of Roundhill, does it start with a couple late night beers at Vanderbilt University, or did the idea of working together come together over time?
Will Hershey:
It's funny, Tim and I have known each other for years, went to Vanderbilt undergrad together. I think the actual genesis for how we said we want to do something and go off on our own. Tim was with Wells Capital on the West Coast, at that time trading investment grade credit. It was actually during crypto. And I want to lie to you and say that we were so intellectually curious, and how blockchain worked. No, it was we were obsessed about the movements and price in various crypto currencies, and that reconnected us after Tim had moved out west several years before. And that was the genesis, was bonding over cryptocurrency and that got the wheels in motion for thinking about financial products and what we could do.
Pete Asch:
What was the point where you said, "Okay, we got to do this. We got to leave our jobs and we got to start this."
Will Hershey:
That's a great question. I had actually left my job a couple months before, so really not being very productive at all, apart from thinking of these new ideas. I think we really decided we wanted to do it when we had identified that we thought eSports was a really exciting emerging market. You had Ninja and Drake streaming on Twitch for hundreds of thousands of people. Fortnite felt like it had a place in mainstream culture for a period there. I think really once we had that first product that we knew we wanted to go out with, and we had the ticker that we ended up with NERD, which is we're ETF nerds, and we're gaming nerds ourselves too, so it was perfect. It was really when we had that product, we said, "We want to go do this."
Pete Asch:
As a Mets fan, I can't believe I'm saying this, but I've heard you speaking about how the Wilpons may have played a small role of inspiring what became NERD? What did the Wilpons buying an Overwatch team mean to you? And then how did you then translate that into actual investor access?
Will Hershey:
Well, we'll see if they stay involved with the Mets for too much longer, because we've got some rumors of some bids out there. We'll see what happens. But they did take a stake in, or they bought, an Overwatch league team, which is an Activision, Blizzard owned eSport. We also saw the likes of Bob Kraft get involved with an Overwatch team. And I think really, you can't buy directly into one of these teams, which are the premier, or glam type assets in the world of eSports. Very analogous to traditional sports, but I think really what we saw was a lot of excitement and interest around the announcements of those investments, but wanted to find a way to really democratize investing in eSports for the average person.
Will Hershey:
Now we can only invest in what's publicly traded just by the nature of being an ETF, and having to maintain liquidity, and those are great parts of the ETF structure. But we said, "How can we, in the best way possible via public markets, really provide people a way in?"
Pete Asch:
I was looking at the Roundhill BITKRAFT Esports Index and it actually brought me back to October 2017, when Sea Limited, NYC ticker SE, raised $884 million for its IPO. And the reason why that's always stood out to me is it was an IPO that the entire New York Stock Exchange Asian based team was so excited about, and most of us had never heard of before, and here it's raising almost a billion dollars. I was trying to look back. I could only see, I think it was the first quarter after the index started, but it looked like Sea was in that originally. How does your index identify a company that, like I said, very few people had heard of when it's raising almost a billion dollars?
Will Hershey:
Yeah. And Sea is still in there now. So it's one of the top holdings. Fascinating company, we could talk about for a while too. But really what we do is we utilize a keyword screening approach to try and identify companies. And we're not actively managing the portfolio, so we're not trying to pick winners and losers based on fundamentals or technicals. But really, identify which companies, in the case of this fund, are most tied to eSports and digital entertainment. And we get there by screening publicly related filings for different keywords. So you can imagine, a keyword is eSports, a keyword is video game streaming, and that really generates, for us, the framework with which we're then able to select securities.
Will Hershey:
And taking that a step further, really what we do, which I think is important and really different and passes, what I would call the sniff test, is we're also trying to, as best we can through this scoring methodology, assign higher weights to companies in our given themes that are really providing you that exposure. I always like to use the example of buying Amazon to get eSports exposure, just because it owns Twitch, which is the largest game streaming platform in the west. If Amazon shutdown Twitch tomorrow, the stock might even go up. So I think that's something that we've done that's really different, as well.
Pete Asch:
That actually brings us to a tweet you did recently along in this lines, and I will quote your own tweet to you. "There are many thematic funds that count Microsoft, Apple, Nvidia, Amazon, Facebook, et cetera, as top five holdings. These are not true thematic funds. They're benchmark replicating strategies with catchy names. Make sure to research and understand what you're paying for." The fact that most of these FANG stocks show up on all these thematic ETFs, is that why you realized you had to be both an index provider as well as the ETF provider?
Will Hershey:
It definitely played into it. And I think controlling that part of the equation, I mean, it's so important. At the end of the day, an ETF is only as good as the underlying... Whether it's delivering on its strategy by selecting the right companies for its portfolio. And whoever tweeted that is a smart guy, I agree with him. But in terms of what I was referring to there, it's not that tons of thematic products hold a Microsoft, or an Apple, or an Amazon. It really comes back to this weighting concept. I mean, if you want to use an example of an autonomous vehicle ETF that holds, let's say Google, because it invested a lot of capital into Waymo. And having that as a top weighting for me, really misses the mark. Now, I'm not an expert in that space. I couldn't name you name to you which company should be at the top of the list, but it's really more so the concept of, one, giving people what the sticker, if you will, says they're getting.
Will Hershey:
People who maybe aren't doing all the research on the underlying companies, when they buy into our Esports Fund, are they getting a fund that's going to benefit as eSports as a whole thrives and vice versa? That's really what we believe our job is. And then taking that to one more step further, is a lot of these thematic funds that I take issue with are ones who are really investing in the FANGs of the world and companies that they hold elsewhere, and charging a premium rate for something that doesn't walk like a dog, and doesn't talk like a dog. It's the S&P 500 in a different wrapper.
Pete Asch:
Education obviously plays a role in that, and using my personal experience with Sea as a sample size of one, how important is it to educate potential investors in these ETFs on the underlying companies, and how do you accomplish that?
Will Hershey:
I think that's always going to be an uphill battle. And at the end of the day, some investors may simply not care. I think for some investors, they're entrusting the ETF issuer to do a good job and to select the proper securities, and they're comfortable in that position. What we believe is, particularly for younger investors, and goes beyond financial products like ETFs, but just younger generations of people are accustomed to learning, at the very basic level, learning about things on the internet on their own. And I think we try and lean into that fact and have our ETF really be "bought" rather than sold. And the way we try and go about it is we're doing a few things.
Will Hershey:
We're writing a newsletter every week that talks about what's going on with the companies in the portfolio. We're putting out blog posts from time to time talking about trends and looking at it through the lens of the underlying companies. And we're also actually just started a new series where we're doing company pages, where we look at an individual company and try and describe what they do in a way that really makes sense. And I think ETFs are just a wrapper. And the really interesting stories are the stories about the underlying companies that make up the ETF themselves, and that's part of what we try and do is tell those stories.
Pete Asch:
I was struck by a conversation you had with Austin Lieberman on the 7investing Podcast, about two things. First, you talked about Counterstrike, a game that my freshman year roommate played endlessly two decades ago, and that it was still going strong was insane to me. But also that how game companies have evolved into what I think, you said the term, GAAS, games as a service model. How does this change a business model help game companies, not just grow, but build a captive community?
Will Hershey:
Yeah. At its core, games as a service, has really been driven off of online gaming in its essence. And when I was growing up and playing Nintendo 64, or even before that Super Nintendo, you went to the store, you bought the physical copy of the game, and if you were lucky, you had two controllers and could play it with your brother, or friend, or sister, whatever. Now what we have is... And the content that you were able to consume was exclusively what was on that cassette or disk? Now what we have is the ability for intellectual property that these game publishers and game developers have, to be continually updated via the internet, and via patches to the players and to the users.
Will Hershey:
And really what this has done, talking about a game like Counterstrike, that's been more than a decade in terms of really being popular and actually growing. I think it just hit its higher user base ever in the first quarter this year, which is incredible. Really, they're able to engage an audience by being, one, free to play has really become a big shift in the industry is, games companies are monetizing actually inside digital economies and virtual economies that take place within the game. And that could mean buying a new outfit for your character, or if it's in Fortnite, buying a new dance. That's one, and two has really been... This concept of gaming as more of a social medium than it ever was before. And people wanting to come back again and again to the same game to play with the same friends and how game companies can monetize there.
Will Hershey:
And really what it's done for... I believe this is what's driven a large part of it. You could also say that digital, as a distribution platform, is actually much higher margin than physical as well. What it's done, if you look at Activision, Blizzard or Ubisoft, or Take-Two is, over the past, call it 10 years, as they've shifted towards this more digital games as a service, continuing to iterate on the same IP, is it's resulted in higher margins. So EA, for example, I think over that timeframe is up like 15% in terms of gross margins. And that's meant higher multiples, because if I can produce one Counterstrike and then monetize it year in and year out, again, and again, and again, whole lot more attractive business model that looks something like software, than if I released one Counterstrike now we've got to put it in hundreds of millions of dollars to develop the next one and so on and so forth.
Will Hershey:
The exception that you see to this rule, although I think a lot of people would be more happy if EA did more with their sports games, is if you ever played their Madden or FIFA, they're releasing a new copy every year versus what would be the games as a service is we just have Madden, and as new players come into the league, we push that patch to our users. So a little bit of a different approach there, but it's all resulted in a much more attractive, I think, business model for the game publishers.
Pete Asch:
It's so interesting, because you think a Madden doing that would make it seem more like the actual sport, where every year they bring in a couple new players and they go with the same teams. After the break, Will Hershey, CEO of Roundhill Investments and I will discuss recent developments and the growth potential in eSports and gaming. That'll be coming up next.
Speaker 1:
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Pete Asch:
Welcome back. Before the break, Will Hershey, CEO of Roundhill Investments and I were discussing the founding of his firm and the creation of Roundhill's first ETFs, NERDS and BETZ. I want to go back to something I mentioned in the introduction, the value of live entertainment to attract advertising and sponsorship dollars for the teams, the players, and even where the events are being hosted. How does eSports and gaming compare to traditional sports today? And what is the terms of projected growth of how much advertising dollars can eSports really handle?
Will Hershey:
That's a great question. I think at its core, what you're dealing with, with an eSports audience, is a much younger audience. Aged demographics that tilt something towards 18 to 35, skews more male, at least in the North American market. If you go to Asia, it's much more split on a gender basis. But these are digital natives that have grown up, not paying for content on the internet. And I think, at its core, that creates just a need for a different mechanism when it comes to monetizing content. And throughout a large portion of the history of eSports, I mean, going on Twitch and watching a stream, it is free, all you need is an internet connection. Very different from large TV deals that have paved the way for traditional sports.
Will Hershey:
So I think there's a couple ways of looking at it. But in terms of media rights, forgetting about advertising for a second. We've already started to see, on the individual content creator level, we consider this eSports. I'm talking about Ninja, who a lot of people have probably heard of, Fortnite gamer, there's Shroud, these individuals have to sign exclusive deals with the streaming platforms themselves, whether it's Twitch or YouTube. Just came out that Ninja actually was just bought out of his contract and it ended up he got paid $30 million in a single year. Now we're talking contracts and salaries that look and feel like they're at the level of the big leagues, so that's one.
Will Hershey:
Two, we're seeing that play out in proper professional eSports. There's a nuance there where content creators are these individual personalities that people want to watch on these streaming platforms. Maybe they're great at the game, maybe they're just okay, but these are people I want to watch. On the traditional side, I think you have a model that's shaping up to be more like traditional sports Activision, Blizzard recently signed a deal for their eSports for an exclusive with YouTube, so you can only watch Call of Duty League on YouTube now. You can't watch it on Twitch. Those types of deals, I think, are going to be really important longer term. And for the platforms, it brings more users and more stickiness, if they have high quality content to show.
Will Hershey:
But I think when we look at the size and growth of what this industry can become, you're talking about 400 million people globally watching eSports. I know that sounds crazy to us in the US, because a lot of it's in China, and a lot of it's in Korea, and maybe culturally, we're not quite there yet. Although getting a taste of it with no sports on TV and virtual NASCAR races on ESPN. 400 million, that's going to grow by several hundred million over the next couple years. And I think, you hit on the head, of what is the biggest question for the industry. Those are already huge numbers. It's a question of how do you best monetize?
Will Hershey:
I think advertising will continue to play a role. I think media rights, like I said, are really going to be the big drivers going forward. But at the end of the day, it's a very different ecosystem than is traditional sports. What you have here is you have companies, some are publicly traded, some are publicly traded on the New York Stock Exchange, that own the intellectual property behind the game. And that would be like as if XYZ Company owned the game of basketball, and no one could play it, and no one could watch other people playing it without sign off from a company. That creates a very different dynamic and very different incentive structure for who the different stakeholders are.
Will Hershey:
I think, at the end of the day, the way the industry is currently set up is really in the interest of those IP holders of the Activision, Blizzards, Electronic Arts of the world, because they control so much power. For the industry to really grow, they'll need to share more and more of that pie, whether it's with players, or with tournament organizers. And that's how it really takes a step to the next level.
Pete Asch:
There's something that you mentioned I wanted to press on. You said they don't necessarily have to be great at the sport. If we're thinking about LeBron James, he's got this giant advertising contract. He can sell anything. But he is also the best in the world at what he does. Is that an issue that someone who, I actually am not familiar with how good Drake is at eSports, but does someone, with Drake's social following, can just step in and already have this following, and be more monetizable for these companies? Is that an issue or just how it is?
Will Hershey:
I think that's just how it is in 2020. And it's always this question that comes to mind, which is, what's more powerful? Is it the individual content creator, or is it the platform? And you see this play out throughout different forms of media. Joe Rogan signing an exclusive contract with Spotify is analogous to Ninja signing an exclusive contract with Mixer. I think it's a great thing that someone like a Drake can get on, play some Fortnite, and bring people in. I think what that really speaks to is how accessible gaming is, as a form of medium, and a form of entertainment that anyone can jump on and play, and have a good time, and maybe even make money doing it.
Pete Asch:
You mentioned eSports on ESPN. Do you think now that major sports leagues are starting to return that this growth will be stunted back down to what it was say late 2019?
Will Hershey:
I think it's somewhere in the middle. I think when we talk about eSports and game streaming, we're talking about a long term secular growth trend that goes after the behaviors and consumption habits of Gen-Z and millennials to a certain extent. So I think it's more of a generational thing. And to that extent, I think that it's going to continue on a long term growth trajectory. No question about it, you saw a tremendous spike with... We even talked earlier about how betters, probably who didn't even know what games they were watching might have been betting on League of Legends. Those types of users or viewers, if you will, probably go away. But did you bring on some new fans that really enjoyed watching what they were watching that maybe stay on? I think on the periphery, sure, but it's really more about that long term growth. That's more generational. I don't think the guys who are watching traditional NASCAR, that were then forced to watch the virtual NASCAR, are going to stay with the latter, when the former is back, which it already is.
Pete Asch:
One of the things also, we're talking about these companies. The MLS is Back Tournament is taking place at the ESPN Complex inside of Walt Disney World, broadcast on Disney owned Fox and ESPN. All this is the culmination of years of consolidation by the Disney Company, which I should note is NYSE ticker DIS. Sony recently acquired a minority interest in Epic Game. What does that say about gaming? And do you think that there's going to be a similar coming together of different players in this front as well?
Will Hershey:
Yeah. Sony invested in Epic Games. Sony's also invested in Bilibili, which is this Chinese streaming platform. Tencent invested. Tencent is mega gaming internet giant in China. We're also seeing this in the world of video game streaming in the west. You've had YouTube really in earnest commit to their gaming. Amazon bought Twitch for almost a billion dollars in 2014. Microsoft tried and failed to launch Mixer in the US. So you have big tech companies that are saying this is a really, really valuable audience. Let's invest time and millions of dollars to try and get in front of it. Some of them have failed. But nonetheless, to me, it suggests that there's potentially something more at play here. And really, to me, it's about user acquisition and getting in front of younger people, and then converting them into, potentially, customers of your other, maybe even higher margin business lines.
Will Hershey:
Sony investing into Epic, I think is really a strategic play for them. You've always heard these rumors of someone like a Disney buying one of the big US game publishers. I think what we've seen is, one, a lot of these game companies are very profitable in their own right. They don't need to sell. They're producing meaningful amounts of cash flow to shareholders, so they're going to warrant a pretty significant premium. But two, running a games company is just very, very different and a very different skillset than running other types of media companies. But I think the underlying theme is legacy tech and legacy media companies are saying there's a really, really valuable audience here. One way or another, I want to try and get in front of them.
Will Hershey:
And a lot of them have failed. Apple tried launching Apple Arcade that I think was a pretty big flop. Amazon just put out actually its own developed game called Crucible that no one listening to this, even if this was a gaming podcast, would've ever played. So I think that's the way to look at it, is they all really want... They're not quite sure, but they want to be involved.
Pete Asch:
Is this consolidation good with something like Kusho, which raised $125 million, I think most of that was from Google folding. And, as you mentioned, Tencent being the clear winner in that one. Is that a good thing or a bad thing? Is that a maturity or is that a problem?
Will Hershey:
I think it speaks to the capital intensive nature. And right now, just to be clear, we're talking about the game streaming platforms once again. I think that just speaks to the battle that's going on in terms of the customer acquisition that we're seeing play out through all parts of the economy, as it relates to tech. It's this grow at all cost grow your top line until the industry matures, which it has now in China, which is where Kusho shutdown. And now you're starting to see winners and losers. So I think it's an organic progression as industries mature. In terms of who that really benefits, certainly the content creators who are signing... And China's a much more mature market, so if you're a pro gamer in China, or streamer I should say, you're signing multiyear contracts for the past few years, so it's very developed.
Will Hershey:
From their standpoint, they have less negotiating power if there's only one game in town or maybe two places they can go stream, but it's definitely attractive to investors in those game streaming platforms. Through our ETF, were invested in Huya and Douyu, which now control a large, large majority of the Chinese game stream market.
Pete Asch:
Speaking of China, in recent weeks, President Trump formed a working group to explore the risk of Chinese companies, and the Senate passed a bill, yet to be approved in the House, to give the Public Company Accounting Oversight Board power to audit all US listed Chinese companies. This would have a market-wide impact, but does that really uniquely affect BETZ and NERDS? You said you have a lot of exposure in the Chinese market.
Will Hershey:
No exposure in BETZ, but a significant amount of exposure in NERD in eSports, where China's one of the most developed markets in the space. It's natural that we would have that weighting. I think what we're going to continue to see, from a de-risking standpoint, is dual listings that are going to take place on the Hong Kong Exchange. We've seen NetEase do it. We've seen Alibaba do it. We've seen jd.com do it. And I think that's really one of the primary risks is what happens if you have a Luckin Coffee situation, where you're de-listed and there's no other exchange.
Will Hershey:
I think more Chinese companies that are listed, their ADRs or ADSs are listed in the US, are going to potentially look to hedge that risk by listing in Hong Kong. Bilibili has already announced that they're going to potentially be looking at doing so. But from a higher level, I think that this is not going to go away overnight, and it is one of those risks is really... We believe that the companies in our portfolio, even though we're passive investors, are legitimate, but that is a concern when investing internationally, especially in a place like China, where you maybe don't get the same level of transparency we're used to.
Pete Asch:
As we wrap up, your first two ETFs at Roundhill has brought to market, probably, a lot because of COVID, end up being much more related than even you probably imagined. But you said that's more of a happenstance than a plan. What sectors are you looking at? And if you refer to keep that private, what are the broad rules that you're using to identify possible thematics?
Will Hershey:
Coming back to our earlier part of the conversation, it's always going to be about the underlying companies. ETF is just a vehicle that sits on top that is hopefully helping people by diversifying properly amongst those securities, rebalancing those securities, and that's really the value we provide as, potentially, if they're internationally listed which we do, giving access to investors. Really, it's going to be about where are the companies in the economy doing the most exciting things to drive the world forward, where we think they have long runway for growth? And right now, there's a couple that we're floating around. We've explored the concept of potentially doing something around electric vehicles. I think were a bit early there, and maybe it would've been great if we launched it maybe two weeks ago before Tesla's run up to the moon, or Mars, or whatever we're saying nowadays.
Will Hershey:
That was one we looked at. Another one that we've talked about, which maybe isn't more tech focus, but fits in nicely with our other two, would be a product that actually does invest primarily in sports franchises. So at the beginning of the call, we talked about MANU. You also have MSGS, which is the parent of the Knicks and the Rangers. Overseas you have A.S. Roma and Juventus that are publicly traded. A lot of people maybe don't know that. So really, we're going to continue to try and identify where we think underlying companies are doing things really interesting and build a portfolio from there.
Pete Asch:
We've been saying two, but there actually is a third. There's a Roundhill Acquirers Deep Value ETF, and that's NYSEARCA, DEEP, that you depart in the expression acquired through Roundhill. Was that just an opportunity or is your plan to build out different verticals for the firm's holdings?
Will Hershey:
A little bit of both. I think at its core, our plan is to build Roundhill as a diversified ETF issuer, and have multiple products in the market. So from that standpoint, it fit. But really we were opportunistic in taking over this fund, which is a deep value fund focused on finding companies that are under-priced relative to their fundamentals. That's going to be different from where our core is really going to be, which is identifying these high growth areas, or maybe not even high growth areas, but areas of the market that really resonate with a younger investor base, that probably shouldn't be investing in single securities. But an ETF can sense in a small portion of their portfolio, if they really believe in gaming as the future, as an example.
Pete Asch:
You made a comment recently that part of your seed funding went into investing in an app. Can you discuss that project at all?
Will Hershey:
Man, you did your research here. So we are pretty early on in development, but ETFs remain our core business. One thing that we came to realize over the past couple years here is, how much... And a lot of this has been driven by Coronavirus too, and Dave Portnoy, and zero commissions, but how much education there needs to be done for young investors who are new to the market? How much you maybe, perhaps, excessive risk is being taken by a lot of people who are new? I think that's good because you learn from your mistakes, but all things equal. Really, we're trying to build an app that potentially gamifies investing, but with a tilt towards not... We don't want to tell people what to do, but really focuses on what they're already doing, and trying to make things a little bit, even more engaging and fun.
Will Hershey:
And that speaks to what our two first two funds are. eSports and gaming are a lot more engaging in some ways, because you can go out and play yourselves, and betting is exactly that. It's this gamification of another form of entertainment. The market isn't meant to be entertainment. It's meant to be a place to build wealth. That doesn't mean a lot of people aren't necessarily treating it that way.
Pete Asch:
You recently posted a job looking for someone who can work on your content and marketing. And we've been talking a little bit about that. Historically, you guys have not done traditional marketing. What is your strategy for raising the profile of your ETFs, but also Roundhill Investments as its own standalone property, besides the great hats of course?
Will Hershey:
We've got to get you a couple of those hats Pete. Remind me after we're done here. And you hit it on the head, it's going to be focused on one to many types of communications. And I think this is really what is so beautiful about things like social media is as a small team, which we are, we can earn a share of voice, if you will, that's well beyond what we are from an employee count standpoint. And we're going to continue to focus on those channels, whether it's continuing with our Twitter, blog posts, newsletters, things that we can really try and educate people about why what we're doing might be interesting. And also look at more traditional advertising as well. I like to highlight that for BETZ, we spent $0 in marketing and advertising, and hit 90 million in assets under management the first month. But I'd be foolish to think that there wasn't a great component of luck there. So we're going to do some of the traditional components as well, but really it's about utilizing technology to tell our story.
Pete Asch:
If someone listening wants to apply for that job, or just keep up with everything happening with your firm, what should they do?
Will Hershey:
Pete, you're going to kill me and flood my inbox. But the best thing to do is go to our website roundhillinvestments.com, or follow us on Twitter @roundhill is probably your best bet.
Pete Asch:
Perfect. Thanks so much, Will, for joining us Inside the ICE House.
Will Hershey:
Thanks for having me.
Pete Asch:
That's our conversation for this week. Our guest was Will Hershey, CEO and co-founder of Roundhill Investments. If you like what you heard, please rate us on iTunes, so other folks know where to find us. Got a question or comment you'd like one of our experts to tackle on a future show, email us at icehouseattheice.com, or tweet at us @icehousepodcast. Our show was produced by Ian Wolff, production assistant, from Stephen Romanchik, and Ken Abel. I'm Pete Asch, your host, signing off from the annex to the remote library of the New York Stock Exchange. Thanks for listening, talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE nor is affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
