CAMERON GLEESON | Betashares ETFs
CAMERON GLEESON | Betashares ETFs
XMET aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of global companies in the Energy Transition Metals (‘ETMs’) industry. ETMs are raw materials that are essential to the transition to a less carbon-intensive economy.
XMET provides exposure to global producers of copper, lithium, nickel, cobalt, graphite, manganese, silver and rare earth elements.
It is passive based on the NASDAQ Sprott Energy Transition Materials Select Index. It is important in certain thematic ETFs to use an expert body. Our philosophy is that their role is to identify all companies in that space. What we're obviously looking for is diversification. In this case, diversification across this selection of different metals. The role of Sprott is they identify companies that have exposure to various metals. They have a very deep database of mining companies globally.
ROYL aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of global companies that earn a substantial portion of their revenue from royalty income, royalty-related income and intellectual property (IP) income.
If you think about the model, if I'm a royalties company that, and I'll go back to the example of, of mining royalties. I actually don't need to really do anything once that mine's up and running. I don't need to employ anyone. I don't need to buy any diggers. I don't need to buy any mining equipment. And so what I'm receiving is just a pure cash flow on that without needing to worry about any, any of that CapEx or, or opex. So from a return and equity perspective, it's quite an
Listeners should note that these are what are known as thematic ETFs. They are not designed to be a core holding in your portfolio. They are used to reflect a view that they can catch tailwinds in certain sectors that you might be interested in.
One interesting thing about thematic ETFs or thematic investing generally is that quite often because the exposure of it's true to label, if it really is a exposure to energy transition metals or to royalties companies, the degree of correlation or the degree to which it moves in the same way as the overall market can be quite low. So it can actually, if you're not allocating too much to, to one of these thematic ETFs can actually really add in terms of risk adjusted returns or in, in effect lower the volatility or riskiness of your overall portfolio.
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The the way that we think about investing, investing thematically is that you are looking to add the potential for outperformance for growth. Your alpha, exactly some alpha. And the point of having it as a satellite or smaller allocation with your overall portfolios. Sometimes, you know, you don't necessarily get alpha sometimes, you know your thesis was, was wrong. So have that, that boring core in the middle, track what the market's doing, and then allocate in appropriately size investments around the outsides as satellites as we call em...
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. This episode is proudly brought to you by BetaShares ETFs. What are the metals that are essential to the energy transition revolution and how can you access the royalties from some of your favorite recording artists? Joining me to talk about these investing themes is Cameron Gleeson from BetaShares G'day Cameron,
Cameron (1m 6s):
G'day Phil. Great to be Here.
Phil (1m 7s):
Thanks very much for coming over. So Cameron Gleeson is Senior Investment Strategist at BetaShares ETFs. We're gonna be talking about two ETFs, Royal r o y l and Xme X M E T. Let's dive right in. What are the metals that will be playing a major role in the sustainable energy transition?
Cameron (1m 25s):
What are known as the energy transition metals, or some people refer 'em as energy transition materials. Yeah. Are a set of materials which are essentially really intrinsic to the electrification of things like transportation. Previously used in internal combustion engine car. We need to move towards electric vehicles. Also the build out of capacity in renewable energies, wind power, solar and alike. And thirdly, really the investment required within the energy grid to enable efficient storage and transmission of electricity. Given the nature of the way we generate power is gonna be very different. This was sort of the genesis of the demand we had for arm investors to provide exposure to the upstream providers of the metals required to build this out.
Cameron (2m 11s):
So previously we obviously talked about, well, we would consume a lot of fossil fuels. In fact it, it's a series of metals and I just to give you a list there, copper, really critical metal for energy transmission and all, all forms of, of renewables and also electric vehicles. But also nickel, manganese, lithium, cobalt, silver, rare earth, graphite. I think I've named them all eight eight metals that currently used in a range of,
Phil (2m 40s):
Oh, so there, there, there's eight discreet metals. Is there Yeah, we're
Cameron (2m 42s):
Talking about here for, for this ETF. Yeah. So I mean there's a lot of study done in this space as to the metals that are required, for example, to generate wind power or generate solar power. Now the way that we approached this from an investment thesis to was to look not just at the metals, which are gonna see sizable increase in demand from ENG transition, but also look at metals where there is some either natural or some sort of supply constraint. Hmm. And we work with our index provider in identifying those metals. So there are obviously other metals that are very, gonna be very important, such as zinc has some use cases in galvanizing wind turbines.
Cameron (3m 22s):
The supply dynamics around zinc aren't quite as restrictive or tight. So price support for zinc doesn't look like it will be as strong as the level of price support you'll need, for example, for lithium. So it was about basically creating a investment case based on firstly the increase in demand, but also some constraint around supply, which means you've got price support and if you're a producer a minor of these materials, you're likely to see, you know, strong revenue growth as demand goes up.
Phil (3m 51s):
And these are called ETMs, aren't they? Yeah. And just generally they, these eight minerals are ETMs.
Cameron (3m 55s):
Yeah, that's right. That's right. So, so the, I mean, some people would describe a wider set of of materials, but this is the set that we describe and define within the index methodology of, of this particular fund, the xme, which is our energy transition metals ETF. Yeah.
Phil (4m 11s):
Yeah. So what are your forecasts for the future demand for these metals and how do you, how do you come to these forecasts? I mean, you must be crunching a lot of numbers.
Cameron (4m 18s):
There are a number of quite well regarded groups that have produced forecasts for how much of each of these minerals will be required. It's important to note that all of those forecasts, whether they're in-house ones that we've done, or independent groups like Bloomberg NEF or for example the International Energy Agency, do forecasts. All those forecasts are based on particular assumptions as to the adoption of renewables, the adoption of electric vehicles. Most groups will do two forecasts. One is a stated policy scenario and that's what, what what we do. And we say what government policies currently exist as to the requirement to transition to electric vehicles.
Phil (4m 59s):
So we're gonna be saying, you know, the US is gonna be saying whatever year it is, where
Cameron (5m 2s):
Yes, that's right.
Phil (5m 3s):
Our vehicles are gonna be a certain percentage are gonna be electric.
Cameron (5m 6s):
Yeah, exactly. Exactly. So that's, that's the low case in some ca in some senses. Cause that's what governments have already committed to. And this is the high case, which is essentially aligned to the Paris Climate Agreement of no higher temperature change over 1.5 degrees. And, and the degree to which those materials are demanded is very variable. But even in the base case, you've got extremely high growth in demand. So take the use in 2020 verse 2040, look at the International Energy Agency forecasts. They see that lithium use in 2040 will have increased by a factor of between 15 to 40 times the figure in 2020. If I look at graphite or nickel or cobalt, clearly very important for electric batteries.
Cameron (5m 51s):
A factor of increase of between sort of seven to perhaps up to 20 times Yeah. Use. And then we also see other materials like copper that have far smaller incremental increase. But there's also some interesting things going on in the supply side around copper, which means that we think that there's reason to believe there'll be strong price support in copper anyway, even though the increase isn't as great. So look, in any case, we're gonna see enormous increase in the demand for these materials. And that's why these miners and producers are investing, are breaking new ground, building new mines to allow supply materials into battery manufacturers, into electric vehicles, into renewable energy equipment manufacturers.
Phil (6m 32s):
Yeah. Some of these metals and minerals are coming from places where the governance issues are quite sad for some of the pe the ways people are mining these, these things. And so you would think that that's gonna be part of the transition as well, that these metals and minerals, we wanna be mined in someplace where we actually treat the people who are mining the, the minerals better than they currently are.
Cameron (6m 58s):
Yeah, I mean, that's right. And also another important point to make is that the carbon footprint from extractive industries like mining is generally quite high. It is important to note that I, if you look at that carbon footprint from mining some of these metals, you'll generally find that on a net basis, the fact that the materials are used for renewables means on a net basis product life cycle, you actually save carbon. But you're right, there are areas like the Congo that have had, we've seen massive issues with artisanal as it's called artisanal cobalt mining. We also see issues around water consumption required for particular forms of lithium extraction
Phil (7m 35s):
Because lithiums a salt, isn't it? And sometimes it just has to be laid on the ground and dried out, doesn't it?
Cameron (7m 39s):
That's one. Yeah, there's two general, there's two kinds. Yeah. Two, two, yeah, that's right, exactly right. Two methods. And the one that's predominantly used in, in South America is, is essentially evaporation. So uses a lot of water. It's important to note in terms of the ETF, we, we, you know, we obviously, you know, know that some people will be very focused on the ESG characteristics of this. Yeah. And, and so we, we use some filters to filter out what are companies that have been marked as having severe controversy. And you also filter out companies that have a substantial amount of exposure in fossil fuels. Because obviously, you know, some of these are diversified miners, they might be mining copper cobalt, but they might also, you know, have some sort of role to play in in thermal coal.
Cameron (8m 24s):
Yeah. And so that was sort of important consideration for us.
Phil (8m 27s):
Although a lot of those companies like BHP are divesting themselves of coal. That's right. But it still goes somewhere else, doesn't it?
Cameron (8m 32s):
Yeah. Well, BHP still got coal, so until they're diverse, then they won't qualify.
Phil (8m 37s):
Yeah. So most ETFs are based on an index. What is the index that this ETF is based on?
Cameron (8m 42s):
The name of the index is the NASDAQ SPRT Energy Transition Materials Select Index. Yeah. Some of these index names are quite long-winded. The important point to note here is that there is a key party involved. So NASDAQ is the index provider. They're calculating the index every day that with ETFs having an index makes it very efficient to manage that money. Spprt is a Canadian asset manager and they're very active in the energy transition metal space and also in precious metals. They have listed a number of ETFs in combination with the NASDAQ in the states. Mm. They bring a real wealth of knowledge and insight into the energy transition space.
Cameron (9m 22s):
One of the key elements of building any kind of ETF is ensuring that you've got true to label exposure. And what their role is, is essentially to identify the revenue exposure or if you like, the exposure of each company in their mining space and what degree it is their revenue associated with each one of those, each of those eight metals. Now, important to note, this is not an an active fund. It's probably a question you might ask.
Phil (9m 48s):
Oh, I was gonna ask, is it active or passive? It's passive. Is it,
Cameron (9m 51s):
It is passive based on that index. So it is important in certain thematic ETFs or the certain sector ETFs to use an expert body. But our philosophy is that what their role is, is to identify all companies in that space. It's not to select which company within that space I prefer because within our, you know, framework of, of providing an ETF, what we're obviously looking for is diversification. In this case, diversification across this selection of, of, of different metals. The role of spprt is they're a selection party and they identify companies that have exposure to various metals and they, they have a very deep database of, of mining companies globally.
Cameron (10m 36s):
And they can tell us what proportion of each company's revenue is attached to each of these particular metals.
Phil (10m 44s):
Cameron (10m 44s):
At that point, the index is entirely rules based. So that's the data input that they're providing due to their expertise. Then the way we build the index is, you can think of those eight metals as eight different buckets, and we try and fill those buckets. We with up to six miners or producers of each metal. Beyond that, we also have another bucket for diversified miners that have exposure to multiple metals. Yep. We also have another bucket for essentially recyclers of these metals because part of the supply chain for energy transition materials is in fact going to be recycling. That'll be an increasingly important element.
Phil (11m 19s):
And, and copper especially, isn't it, that's becoming increasingly important copper to recycle it as well, isn't it?
Cameron (11m 25s):
Copper? The, the real issue with copper is that the grade of reserves in large tier one copper mines is declining, and so supply is likely to drop off. So there is a need to, and copper's actually quite recyclable, so it's good, but there's a need to provide recycling there. But another important element is in the electric vehicle space, the recycling of the batteries, the lithium ion batteries, and if you look at the regulations put out by the EU, they're in fact mandating that European automakers have a certain portion of that battery made from recycled battery elements. That industry of recycling electric car batteries isn't enormous at the moment because most of these electric vehicles have only just hit the roads. We have to wait until those cars reach the end of their useful life, and then we see that as they're retired, those batteries get recycled.
Cameron (12m 11s):
But that's all part of the picture. It's essentially the upstream supply of all these materials because we know demand for these materials is huge and we know that cons, that supply is constraint. So from an investment standpoint, that's, you know, quite a good market dynamic for, for investing. And it's one that we expect to play out over the long run. This isn't gonna be something that plays out over just the next year. This is a multi-decade thing.
Phil (12m 33s):
Yeah. And it's also because they're commodities, the price is going to go up and down without, without any rhyme or reason many times, isn't it? I mean, yeah. And, and a lot of, there's a lot of listeners who would've jumped on the lithium craze of the last few years and they just buy individual lithium miners. Why, why, why not just, you know, invest in the mines themselves?
Cameron (12m 54s):
Yeah, that's a, yeah, that, that's an excellent question. One of the sort of, you
Phil (12m 57s):
Wrote it almost.
Cameron (13m 2s):
Yeah. Look, one, one of the elements, you know, if you look at, for example, lithium in isolation, is that we think, you know, very long term that, that the, it's likely that we're gonna see a deficit because while there has been a lot of projects that are coming online, the growth in projects year on year, year after year is just enormous. So longer term we, we think it's, you know, quite a constructive picture. In the short term we can see these, you know, sort of quite, you know, dramatic moves in that particular material. One reason you might think about investing across the suite of materials, if you take battery materials, right? Like, so the way that that battery manufacturers have adapted over the last 10 years in terms of building batteries, the two things they're looking to optimized for are basically energy density and cost.
Cameron (13m 50s):
If you look at cobalt, cobalt has been an element that has become increasingly more expensive. Cobalt's very important for ensuring the battery's stable, but battery makers have managed to alter the chemistry to reduce the amount of cobalt in the battery because they don't wanna deal with the ESG issues with, with, with, you know, some co cobalt from the Congo. That's right. And they also want to ensure that they can produce that battery at a certain cost level. And so we see alternate chemistries competing in terms of the ratio of different materials used. So in some senses, investing across a group of companies across a range of those materials is go likely to mean that no matter what happens to battery chemistry, you are likely to, to win or, you know, receive pretty good returns.
Phil (14m 37s):
I suppose then it'd be very difficult for you to individually go, well, what's the composition of gonna be for a battery next year? Exactly. And which company should I be in for there?
Cameron (14m 45s):
Exactly. Exactly. Yeah. Yeah. Right Now the way that most people think about batteries is that a high nickel content, for example, is very good for, for energy density. However, there are alternate chemistries that prioritize a higher manganese content that are being worked on. So holding that sort of basket exposure Yeah. Means that you, you know, you have less of that, of that risk on a single, on a single, you know, chemistry technology.
Phil (15m 9s):
And what about policy decisions? I mean the, in the inflation reduction act, I'm not sure about the naming of that particular policy, but there seems to be a lot of Yeah. Funding of ESG and new, new renewable technologies in that as well.
Cameron (15m 24s):
Yeah, yeah, that's an interesting one. The, the US Biden policy, the Inflation Reduction Act, I guess it would've been harder to get it through Congress if he, if he called it the Green Energy Act. Yeah. So essentially this includes a range of measures which were really designed to support the build out of supply chains in energy transition materials, and the build out of a renewable energy industry in the United States, which is obviously strategically important because China is in fact really become the leader in, in a lot of these spaces. And one of the things you, you would argue Biden has tried to do is really, I think you could describe it as weaponizing the US consumer by allowing a consumer who wants to buy an electric vehicle to receive a tax credit, but that tax credit is based on the source material for the battery material is used in that electric vehicle.
Cameron (16m 16s):
And so the source material must be sourced from a company that America has a free trade agreement from. And if some of that is sourced from China, well then that tax credit goes away entirely. Yeah. So you can see where there's some, you know, political, there's
Phil (16m 28s):
Some levers being pulled.
Cameron (16m 28s):
That's right, yeah. Geopolitical adjusting. Yeah, exactly right. Exactly right. And that, that's a real positive for, you know, producers in Friendly Nation states. And we're also seeing, for example, the release of what was in the states, the US critical mineral strategy, which provides, has provided funding to a number of these producers in Australia produce one of these critical mineral strategies just in the last sort of six months. And we've seen companies like Pilborough Minerals receive government funding, cheap government funding to build out their capacity. So there's certainly some tailwinds from that side. And I, I don't think that that's a short term, you know, driver. I, I think we're gonna continue to need much greater growth in supply.
Cameron (17m 9s):
And so you'll see an encouragement from policy like that.
Phil (17m 14s):
So can you talk about a couple of the constituent companies in this ETF? Who are the biggest ones?
Cameron (17m 19s):
Yeah, so look, I mean the, the index itself is designed to be diversified. So each stock in that index, a 6% stock cap is applied when we rebalance. And so generally speaking, you know, the, the biggest name, so
Phil (17m 31s):
Six one company can only take up 6% of the whole portfolio.
Cameron (17m 35s):
Yes, exactly right on the rebalance date. Yeah. In, in between. If that company, it can go up or down outperforms. Yeah. But we'll rebalance it back down. But some of the bigger names, for example, Freeport McMorran, which is the world's largest copper producer u US company there, most of its revenue from copper and, and has some of the lowest cost copper mines in the world. In Australia, there's a number of names. So for example, IGO Limited, who has pretty significant nickel assets, also has a share of a lithium hydroxide plant, which has recently been commissioned Kwinana, in WA, companies like Lynas or Sera Resources who operate in the graphite space and have the lowest cost graphite mine in, in outside of China.
Cameron (18m 18s):
And then we, we'll also see o other, other names from offshore MP materials corp, a leader in, in rare earths and alike. And then even beyond that, if we talk to, to recyclers, there is a, you know, company that I think is quite interesting called Umicorp, which is a Belgian metallurgy company who have really been a market leader in terms of battery recycling. That forms part of the overall part of the overall mix. It's interesting to know that while some of these companies are relatively dedicated to a single material, so for example, lithium producers tend to be specialist lithium producers, there are others that are somewhat diversified that have exposure to whether it be, you know, silver copper or whether it be, you know, nickel, silver, copper, cobalt.
Cameron (19m 8s):
Because sometimes in these mines you're not just extracting a single material, there'll be multiple byproducts beyond the, the primary material extracted, but that gives you some sort of flavor for the overall mix of producers. I think.
Phil (19m 21s):
Talk to me a little bit more about that Belgian company, the, the metallurgical one, because you sound particularly interested in that one. Yeah, yeah. What is it that interests you about it?
Cameron (19m 29s):
Oh look, I mean I, I just think like the
Phil (19m 31s):
Way, and they're doing batteries. Is it lithium batteries that they're recycling?
Cameron (19m 35s):
That's exactly right. Yeah. So, so if you look at the way they've embedded themselves in that ecosystem, they're formed strategic partnerships with automakers and with battery manufacturers. And look, I, I think I might have mentioned this earlier in the podcast, the EU has policy which is quite supportive of recycling. And so, you know, the way that this looks like it may evolve is one of the big things that people worry about with their electric vehicle is what happens if my battery dies?
Phil (20m 2s):
Yeah. Where does it go?
Cameron (20m 2s):
Yeah, exactly. Yeah, exactly. Is the car a ride off? Well, you know, if you think about where these arrangements can be structured, there is residual value in that battery. And so an automaker can give a, you know, guaranteed value for this car, or at least the battery and replace the battery after period of time if they have such an arrangement in place. And obviously there can be savings from recycling over extracting new or so that, that's very positive. And creating a sort of a closed loop strategic relationship with, with your manufacturer, your automaker and the provider of the materials means that you can guarantee green credentials and also guarantee
Phil (20m 37s):
It's a virtuous cycle, Isn't it?
Cameron (20m 39s):
Exactly. ESG credentials. And so they, they really are seen as a leader in that space. So that's, that's, I think it's just gonna be a really interesting one to watch.
Phil (20m 49s):
This episode is proudly brought to you by Beta Shares ETFs. Okay, Cameron. So we're gonna move on to the Royal ETF, R O Y L. And I was particularly interested in this because I've got a, a background in music and, you know, I, I immediately saw royalties, you know, you're gonna be making money out of those, those royalty streams at artists.
Cameron (21m 8s):
I know it's close to your heart, right?
Phil (21m 9s):
It is very, very close to my heart, however, but it seems to be that it's not just music, is it? It's mining music and pharma.
Cameron (21m 17s):
Yeah. And, and actually IT as well,
Phil (21m 19s):
It it as well. Yeah,
Cameron (21m 20s):
Yeah. That's right. That's right. Yeah. So the use of of of royalties to, you know, either engaging in commercial relationships to help in financing solutions has been growing after over the last 20 years. And, and also, I mean, we can talk specifically about about music, the way that people have been consuming music Yeah. Has led to, I shall we say, sort of a different business model, which is very much in line with it, with a, a royalties type business model.
Phil (21m 47s):
Yeah because we've heard of so many artists who've been selling their catalog recently, you know? Yeah. And I was always shocked that Bob Dylan's was like only 300 million in Bruce Springsteen, I think was 500 million.
Cameron (21m 58s):
Interesting. Yeah. And you remember the Bowie bonds from back in the day?
Phil (22m 0s):
I sure do. Yeah. Because they were the first ones, weren't they? Bowie Bonds, David Bowie, that's right. Monetized his catalog very, very early in the piece. Yeah.
Cameron (22m 6s):
They probably only cost 2 million or something at the time. It probably would be a bargain now. Yeah,
Phil (22m 10s):
Yeah, yeah. That's right. Okay, we will get onto the music royalties, but how do royalties work in the mining sector?
Cameron (22m 18s):
Yeah, so I mean, there's different types of royalties. One royalty that people might be familiar with is a, is a finance royalty. And this is typically where you have a mining company, but this can apply to other areas like the r and d within the healthcare for, for new drugs, healthcare industry. But if you think about this from the context of a mining company, if I'm, you know, a small cap miner, I may not necessarily have the capital to basically develop my mine site. And developing a mine site can take years and years and
Phil (22m 49s):
Years. Yes. Years, decades, almost sometimes.
Cameron (22m 51s):
That's right. That's right. So, so, so then having no cash flow means that financing that with debt can be prohibitive. So rather than using debt financing or equity financing, which will dilute my interest, one option I have available to me is to look for someone who's willing to provide financing, but receive a royalty payment, which is often in the form of a proportion of the overall revenue, not the earnings, but the revenue generated from that or when it's sold. So that's one model that's been used. Another model, which is a variant on that, is rather than taking revenue, receiving an off cut or a, a proportion of the ore or whatever that resources produced at a very heavily discounted price is another way.
Cameron (23m 39s):
Phil (23m 39s):
You're not being paid in cashier being paid in ore
Cameron (23m 42s):
Exactly. Getting paid in or Yeah. But, but getting that all quite cheaply. And then a third model, which is particularly widely used in the oil and gas field is there are companies that in fact own the land rather than providing financing to help, you know, exploit that resource. They, they're providing basically that, that patch of, of shale land. Yeah. So that, that a driller can come along and drill that and they'll, they'll receive a payment for the fact that they own that land
Phil (24m 8s):
Like the Beverly hillbillies with their oil.
Cameron (24m 10s):
Exactly, exactly. That's right. So
Phil (24m 12s):
Yeah, you get a gusher and you just sort of take a bit of a percentage of that gusher, but let someone else drill for it.
Cameron (24m 15s):
That's right. Yeah. And then move to Beverly Hills. Yeah. Yeah. So, so they're the three sort of main types that you used in, in the, specifically in the mining and the oil and gas sector,
Phil (24m 25s):
Because you alluded to how mining can take a long time. And so investors who want to get royalties from these, these mines can be investing at all sorts of different stages all the way from just a geological survey all the way through to ready to drill, can't they?
Cameron (24m 40s):
Yeah, yeah. That's right. That's right. And, and
Phil (24m 43s):
They've got different characteristics as well. They, that's, don't
Cameron (24m 46s):
They? That's right, that's right. And what we've actually seen with royalty companies over the last couple of years is they've actually been, you know, when you have a royalty stream, which is where you are earning revenue, that's obviously generating cashflow. We've seen that there's been quite a lot of activity with mining companies discovering all sorts of royalty entitlements on their books. And they've in fact been looking to sell them off to, to realize value. So a lot of royalty companies have been spending the last couple of years actually investing and building their business, building their royalties book. And they're obviously, you know, not thinking about what the royalty's worth today, but thinking about what that's worth, once that mine comes, you know, production comes online. And a couple of other advantages there in terms of the structure of royalties is that firstly you are absolving yourself of the, the operational risk of the mine site.
Cameron (25m 35s):
So a mining company will, will really focus on operational excellence, how they ensure that the mine is producing all but keeping the cost low. By investing this way, you're taking exposure to the commodity price, but without that operational risk. But you can also get further upside when a mine increases its overall scope, or they realize that their size of, of the reserves are in fact much greater. So there's potential upside there beyond, you know, the, the original base case as that mine gets expanded. So there's a number of ways to win there.
Phil (26m 6s):
And it's very similar for pharmaceuticals and, and biotech, isn't it? Because again, it's a longtime horizon. It can be really capital intensive. And this is where the royalty model plays out as well, isn't it?
Cameron (26m 17s):
Yeah, a absolutely. Like we've got a company, for example, Royalty Pharma that sits within our ETF and you know, they own royalty streams that are attached to some very well-known, you know, drugs that are, you know, very well used by, by consumers. And, and those royalty streams obviously do last for, for a very long time. But there is a upfront risk there, and that needs to be funded that, that R and D development can, can obviously take years and go through many stages.
Phil (26m 46s):
And it's not very capital intensive, is it? This, the royalty business doesn't involve a lot of capital, doesn't it?
Cameron (26m 51s):
Yeah. So I guess you'd say it involves a degree of upfront capital in terms of the original investment, but working capital, you know, I, if you think about the model, if I'm a royalties company that, and I'll go back to the example of, of mining royalties. I actually don't need to really do anything once that mine's up and running. I don't need to employ anyone. I don't need to buy any, you know, diggers. I don't need to buy any mining equipment. And so, you know, what I'm receiving is just a pure cash flow on that without needing to worry about any, any of that CapEx or, or opex. So, you know, from a return and equity perspective, it's quite an attractive business.
Phil (27m 29s):
And this business model, it's so it works in such a similar way that you can actually put music companies, I mean we're talking about, you know, Universal and Warners, they've very huge Yeah. Music companies, but really this model is similar enough to be able to plonk them into the same ETF, isn't it?
Cameron (27m 45s):
Yeah. So I, I mean, I, I wouldn't, I, I'd almost say that if you think about the way Royalty's sort of evolved in the mining spaces, it was almost independent of what's happened in music. Yeah, yeah.
Phil (27m 53s):
And because Royalty's copyright has been around for 150 years, something like that. Yeah,
Cameron (27m 58s):
Exactly right. Exactly right. Probably, I mean, as you'd be well aware, what what's changed in, in, in music in particular has been the way that consumers consume being connected to, you know, you know, basically, you know, listening to it to a song and, and that's led to a model which very much aligns to a royalty stream. And companies like Universal, obviously, and Warner and, and others, but also companies that operate within the IT space that specialize in, in royalties attached to the use of software have a very similar model where there's intellectual property and the royalty stream is based on that intellectual property.
Phil (28m 39s):
I was thinking of a joke about precious metals and goldens platinum records, but anyway,
Cameron (28m 44s):
Wasn't bad. Bad.
Phil (28m 45s):
That's not bad. Not bad. When we're talking about a catalog of music, an artist like Bruce Springsteen or Bob Dylan, they've written so much music and copyright resides in many aspects of that music. And the record companies have it. There's the publishing, there's the mechanical royalties. I mean, I won't get in the stuck in the woods there, but it can get quite complicated. Can't Yeah,
Cameron (29m 6s):
Yeah, yeah. There's, there's, there's like for example, if you, you think about what's the, what's the song? The classic example is the Dolly Parton song where she owns, where there's the composition and there's the master master recording that's the master recording that, that Whitney Houston did of I Will Always Love You, that's the one. Yeah, yeah, yeah, yeah. And just the way that that's broken up is very interesting. And as I understand it also, you can carve up that royalty stream between advertising uses.
Phil (29m 38s):
Well that's the other thing. Advertising use is a huge part of it as well. When a song, when a, when a song is used in an advertising or as part of a movie soundtrack, yes. That's gonna suddenly generate a huge amount of royalties, isn't it?
Cameron (29m 49s):
Yeah, yeah, yeah. Yeah. And, and it also has been interesting, the, the, I mean we talked about it initially, but there have been a number of artists that, you know, were very big back in their day and people, you know, using streaming services have rediscovered them and realized, you know, how good the quality of the music was and the value of, of those particular back catalogs is just, you know, skyrocketed. I think one thing that's quite interesting, and it, this is probably a bit beyond the scope of, of, of anything that, you know, concerns this Royalty's ETF is how do you think about the value of a particular songwriter's work today? How do you decide whether that's gonna be classic and enduring, so therefore have this long tail of revenue attached to it?
Cameron (30m 36s):
Yeah. Or is it going to be a flash in the pan?
Phil (30m 38s):
Is Cardi B gonna be worth this much money in 20 years time? Yeah,
Cameron (30m 41s):
I hope not. I can give you one, one interesting stat, just some stuff I was reading in the, so Universal music, they were talking about the streaming services in, in, in the US being at about 80% penetration rate for videos or for tv. Yeah. So, you know, if you, if you think Netflix,
Phil (31m 2s):
Cameron (31m 3s):
Of the, about 80% of the
Phil (31m 5s):
Cameron (31m 6s):
Yeah, yeah, yeah. Or consumers, whereas it's only apparently music streaming incredibly only sits at 25% now I think really, I think it must be a global figure.
Phil (31m 15s):
Where and where else are they getting the music from?
Cameron (31m 18s):
Good question. Yeah, I guess there's probably people who are not using a paid service. Paid subscription service. Yeah, yeah. Would be my guess.
Phil (31m 26s):
Don't think anyone's buying CDs anymore,
Cameron (31m 28s):
Are they? No, no, I, I doubt it. I doubt it. But I imagine some people would just like almost listen to, I don't know, YouTube free or something like
Phil (31m 35s):
That. Yeah, yeah, I guess so. Cuz there is a lot of music available there for free. But, but that's interesting too about Spotify is how much of their revenue goes straight to copyright payments and you know, to me I sort look at Spotify and I go, how can we make money out of this? All the money's going to the artists and how much is left over to run Spotify, however, yep. It is like a very, very solid income stream.
Cameron (31m 58s):
Yeah. I I I guess for Spotify themselves, I mean the fact that they own the consumer gives them a lot of market power and you know, I kind of worry about the artist really, like where, what, what are they left with? And I, I don't, you'd know much more about that myself, but
Phil (32m 12s):
Yeah. Well I think an artist gets, what is it? A million streams is worth $5,000 US for an artist on Spotify.
Cameron (32m 20s):
Doesn't sound like a No,
Phil (32m 23s):
You gotta be doing a lot of streams. That's right.
Cameron (32m 25s):
Phil (32m 26s):
Yeah. Okay. We're looking at these, these are thematic ETFs, you know, and possibly not a good idea to have them as core of your ETF. How, how should investors be considering these as part of their portfolios?
Cameron (32m 36s):
Yeah, it's a very good point. I I, you know, we, we do think we are an ETF provider. We provide a wide range of ETFs and the focus of most of our conversation with investors is those low cost core building blocks. These are as, as you mentioned, thematic ETFs. The, the way that we think about investing, investing thematically is that you are looking to add the potential for outperformance for growth. Your alpha Exactly. Yeah. Some alpha. And the point of having it as a satellite or smaller allocation with your overall portfolios, sometimes, you know, you don't necessarily get alpha sometimes, you know, your thesis was, was wrong. So have that, that boring core in the middle track what the market's doing and then allocate in appropriately size investments around the outsides as satellites as we call 'em.
Cameron (33m 26s):
One interesting thing about thematic ETFs or thematic investing generally is that quite often because the exposure of it's true to label, if it really is a exposure to energy transition metals or two royalties companies, the degree of correlation or the degree to which it moves in the same way as the overall market can be quite low. So it can actually, if you're not allocating too much to, to one of these thematic ETFs can actually really add in terms of risk adjusted returns or in, in effect lower the volatility or riskiness of your overall portfolio. You don't wanna allocate 50% to one of these funds because that would be quite volatile, but sizing it at, and I don't want to, to give, you know,
Phil (34m 10s):
We don't wanna give any advice,
Cameron (34m 11s):
I'll, I'll call this, this is generally nature only, no personal advice, but you know, an allocation of perhaps 4%, you know, it might be appropriate for your circumstances might be and, and, and might, you know, lower the overall portfolio of volatility because of the way that fund acts so differently to the broad market.
Phil (34m 31s):
So I've got to ask you happy to ask tackle a couple of listeners questions. Okay. Yeah, yeah, yeah. Okay. So we've had a listener question. Thank you Matthew Donato, and thank you very much for the kind words you've said about the podcast. Matthew's going through and listening to every episode at the moment as we speak. Oh great. And he wanted to, and I said, I'd mentioned that you'd be coming on and he had a couple of questions about ETFs and one was he wanted to understand about the net asset value or the nav nav and how to assess it of an ETF.
Cameron (34m 58s):
Yeah. So your net asset value is essentially the value of one unit in that fund. So what is the unit price if you are thinking about it, the equivalent for a single share? What's the share price of bhp? That's the way you would sort of think of the underlying value of, of one unit o of an ETF. It's calculated daily at the end of the day at close, but on market in between closes the amount that you trade will be relatively highly related to, to that nav will vary with intraday with market movements.
Cameron (35m 38s):
Phil (35m 38s):
It's ne it's never gonna deviate very much from the net asset value, is
Cameron (35m 42s):
It? Yeah, so, so it shouldn't deviate very much. It'll, you know, what will dictate that is, you know, events that happen intraday, but, but generally speaking of ETFs are, are relatively efficient and generally speaking have very tight bit are spread. So they tend to trade around what we'd call the intraday nav, which is a live calculation as to what the value of that fund is at that point in time.
Phil (36m 4s):
Yeah, maybe you could describe like an a six 200 etf. Yeah, yeah. How that works.
Cameron (36m 9s):
That's a great idea. Yeah. Yeah. So then that asset value, let's talk about that way. If we think about the value of, of a fund and let's use a a 200 fund, which is our Beta shares Australia 200 fund. It's basically the 200 largest stocks market capitalization weighted if we think
Phil (36m 24s):
Of the, and that's about the number of shares on issue multiplied by the price of those shares basically, isn't it?
Cameron (36m 30s):
Yeah, yeah. So,
Phil (36m 31s):
So and that can change it all the time.
Cameron (36m 33s):
They do. They do. Yeah. So if that's 200 stocks, they're holdings within that fund will be based on the proportion of each of those stocks within the index. Each of those stocks will vary on a, on a daily basis. And so imagine you had a single stock that was, was half of the overall index, not that that's the case, but just to simplify things,
Phil (36m 54s):
Well the miners in the, in the big banks,
Cameron (36m 56s):
But yeah, you're not quite, but yeah, so if, if that si, if that single stock doubled in value from one day to the next then and that stock was half the overall index and the overall indexes nav would go up by about 25%, half of 50%. Yeah. But it really is the accumulation of each of the valuations of the individual stocks that are held within that ETF.
Phil (37m 21s):
Okay. And the other question is, what's the difference between hedged and unhedged ETFs?
Cameron (37m 26s):
Yeah, so when people refer to hedged and unhedged, they're typically talking about currency hedging. Now a unhedged ETF or an ETF without currency hedging is typically a global ETF. So it may well be global equities and because I don't have any hedging in place, one of the factors that will influence the performance of my ETF would be the value of the US dollar verse other global currencies. So let's talk about this within the context of ndq, which is our NASDAQ 100 ETF, which is all US listed equities. Now for this fund, if the value of each stock in that index doesn't change overnight, but if the US dollar was to appreciate by 10% against the Australian dollar, then for my Australian investment in Ndq, the value of that nav will go up by 10%.
Cameron (38m 25s):
So what I have there is an exposure which has changed because of the currency, not because of the value of those stocks in their natural currency. Now for a lot, lot of people that's quite an attractive way of investing. They prefer to invest on an unhedged basis. Some people would say that that provides extra diversification, other people might prefer to invest taking out that currency risk. And so what a fund manager will attempt to do here is that they'll hold, say, you know, $100 million worth of stocks in the nasdaq, but they'll also have a hedge such that if the value of the US dollar appreciates by 10%, the currency hedge in this case will lose, you know, the equivalent 10% of the value.
Cameron (39m 16s):
So you are maintaining direct exposure to the US dollar performance of the underlying stocks.
Phil (39m 22s):
So it's just basically on a one for one basis between the Australian dollar and the US Dollar.
Cameron (39m 25s):
That's right. That's right. So you can look at the US NASDAQ performance and and understand that's roughly speaking what you're getting exposure to. Yeah.
Phil (39m 33s):
Okay. Matthew, thank you very much for those questions. Cameron, thank you very much. I've really enjoyed talking to you Today.
Cameron (39m 38s):
Thanks Phil. Yeah, that was great.
Phil (39m 39s):
Thanks very much.
Cameron (39m 40s):
Okay. See you next time.
Chloe (39m 42s):
Thanks for listening to Shares for Beginners. You can find firstname.lastname@example.org. If you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.
Phil (39m 55s):
This episode has been proudly brought to you by BetaShares ETFs.
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