Editors' Note: This is the transcript version of the podcast we published last week. We hope you find it useful.
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Jonathan Liss [JL]: Welcome back to Let's Talk ETFs. I hope everyone's holidays are going well. A brief reminder that you still have two days left to tax-loss harvest. So, if you have any losses and your markets were up pretty much across the board this year, but if you do have losses, you can try and offset some gains if you are in a non-tax deferred account. Here is wishing all of our listeners a Happy New Year and much success in 2020. For reference purposes, this podcast is being recorded on Thursday, December 12, 2019.
My Guest today is a pillar of the ETF industry. Ed Lopez joined VanEck in 2009 and serves as Head of ETF product for VanEck Vectors ETFs. He is responsible for product development, market research, competitive analysis, advertising, public relations and sales support. Ed has over 20 years of ETF marketing and product management experience and serves as an ETF industry spokesman in the financial media and at ETF conferences. Ed earned a BA in Economics from the University of Texas at Austin and for those that will be in attendance at Inside ETFs, the final week of January this year or next year, actually, Ed will be speaking as he has in years past. So, make sure to check him out there. Any way welcome to the show Ed, it is a thrill to have you here.
Ed Lopez [EL]: Thank you very much, it is a pleasure to participate.
JL: So, the working title of this episode and we'll what the editors do with it, but we are going to, I am hoping we are going to go with VanEck staying one step ahead of the ETF innovation curve. I think pretty much every firm would love to claim that they are staying ahead of the ETF innovation curve, but in VanEck's case as someone that has been personally following the ETF space since 2006, it's actually true. So, from the bio on your firms website, just took a small snippet from there, you guys write VanEck has a history of looking beyond the financial markets to identify trends that are likely to create impactful investing opportunities, and you go on to list that you were the first asset managers to offer access to international markets gold in 1968, emerging markets in 1993, and ETFs in 2006.
So, before we get into the specifics here, and I'd love to get into the ETF innovation process with you before we get into some of the specific funds that are on the more innovative end of this spectrum that are in VanEck's line-up what would you say it is about the culture at VanEck broadly speaking that has led your firm to remain at the forefront of innovation in the asset management space?
EL: Yeah. That's a good question. It really starts at the top. We are fortunate to work for a family-owned company that's been around for quite a long time since 1955. It was founded by John van Eck and today Jan van Eck, his son now runs the company. And I think over the course of decades and experience that we've had in different market cycles, we bring kind of a historian approach to markets and apply kind of the [indiscernible] perspective to markets and trying to look for ways to improve the investing experience and outside of that I think just the legacy of the firm and the nature by which we got into investment management has just led through over the decades.
Always looking for looking outside the box for different ideas or maybe areas of the market that haven't been tapped before, but keeping in mind, I think an overriding philosophy for us is keeping in mind that what markets evolve, and you have to evolve with them. And if you keep that in mind, you can continually try to adapt either [head strategies] that you have introducing new ideas, but I think you help keep the idea generation fresh, but outside also starting at the top are the people in general that I think VanEck attraction in the hires, they are people, experienced people from the industry and we bring in new people from college or what have you, but people that I think finds success here in life being at VanEck like the flexibility that we have, the adaptability that we have, and to try new things. I think you have to be a person that is willing to roll with the changes and likes to try different things because we get into a lot of different areas.
JL: Yes, definitely. And you definitely have tried a lot of new things over the years. So, just off the top of my head going back to 2006, and I guess interestingly my time following the ETF space really overlaps with when VanEck first got into the ETF space. So, you were probably launching your first fund GDX like really maybe the same week or so that I started at Seeking Alpha. You launched it, when in May 2006, correct?
EL: Yeah. Definitely 2006. Yes.
JL: Yes. So, right around then. So, that makes sense. So, just off the top of my head going back to those early days, I can think of a bunch of specific ETFs that VanEck was first to market with and I'm going to leave a bunch of things out here because I think it's probably the case with a high percent of your products, but I'm thinking about things like the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), and then the VanEck Vectors Junior Gold miners ETF (NYSEARCA:GDXJ), both of which have massive followings on Seeking Alpha. Combined I think more than a hundred thousand people follow those stocks get alerts whenever we put our news or analysis on them.
I'm also thinking about VanEck Vectors JPMorgan Emerging Market Local Currency Bond ETF (EMLC), which was the first of its kind, your Vectors Russia ETF (RSX), which was the first Russia focused ETF to market and really one of the first single country emerging market ETFs to launch and then also I'm thinking of your Fallen Angel High Yield Bond Fund (NASDAQ:ANGL), which I hope we will get into later which was also a first to market. There are so many others. Your Vietnam ETF (VNM), your wide mode ETF (BATS:MOAT), your gaming in e-sports ETF (NASDAQ:ESPO) from last year. So, I'm sure our audience would love to hear more about VanEck's fund ideation and launch process, as you've clearly been ahead of the ideation curve for a long time, and the innovation curve for a long time.
So, here goes, how do you guys decide from a process standpoint, which markets or sectors or themes are right to have the gap filled with a new ETF launch. In other words, I mean, we're obviously 25 years into the ETF revolution here and there are less and less gaps to fill in terms of sectors and asset classes missing funds, but there still are many, many places where new funds can be introduced or twists on existing funds. So, what does that process look like exactly?
EL: It really kind of differs by strategy or idea, and it's changed over the years, that when we launched GDXJ. It was still early days for ETFs and there were a lot of spots to pick and you could put out a great trading product like GDX, generally market cap related whatever and see some success and be first to market in that regard and see some success. Things have changed obviously over the years and now we're into kind of factor world and smart beta world and now we have to a little more selective about what we launch and how we do it, but at the end of the day is, are we, we are looking at markets drawing upon our, I guess our historian approach if you will of an education around a market history, and trying to ask ourselves where our market is going, and what are people dealing with today that we might be able to help improve upon or help provide exposure to?
A big part of our philosophy is access, you know accessing different opportunities. And as markets evolve, different opportunities come about. And again, for some strategies it varies. Maybe there is, if you're talking thematic strategies like we - maybe we'll talk about it a little bit later, you know we launched our video gaming in e-sports ETF recently. That was something that was in the news quite a bit and obviously that grabs your attention a little bit and then you want to dig into it, and you dig in and you find out a really great story behind in and so that captures our attention or something like emerging markets look a currency debt as you previewed prior. It was an area at a point-in-time where we're dealing with really low interest rates and when we launched emerging market, where, had improved…
JL: Sounds similar to today.
EL: Yes. Exactly. They are still going on, but emerging markets were more of an area where people can find additional yield. They were improving their balance, their books if you will of financials and so, it was, we took the risk to take that opportunity to find that exposure because we thought that investors could benefit from something like that as well, but it comes from everywhere. We have a large active management mutual fund team that particularly specializes in hard assets and also in emerging markets, and one of our more popular funds are Junior Gold Miners that came to the hard asset team. They suggested maybe you guys should try and look at the small cap juniors in the gold space and that kind of lead to GDXJ. Other times it comes from discussions with clients where it comes directly from - Jan van Eck will come in one day and say, okay, we need to launch this fund.
It happens from all over the place, which is great. It can happen from different departments. We've had ideas from somebody in legal, getting ideas from obviously my team and product from our active managers from clients, but at the end of the day when we look at it is, alright, can we sell it. I mean, does it actually add value to client's portfolio if you would get that exposure for the long-term? Is there a long-term persistent theme to it, if it happens to be a theme? And then the other factors come into play, is there enough history around, is there an index brand perhaps, is it a simple story? There is a lot of different factors that come into play depending on the strategy.
JL: Yeah, sure. So, I guess, wondering then because you do have some funds like the Merk Gold Trust (NYSEARCA:OUNZ) or like your Retail ETF (NASDAQ:RTH) or the Vectors Israel ETF (NYSEARCA:ISRA), which all had earlier equivalence on the market already well-known funds in the case of gold like GLD and IAU or XRT which is the SPDR Retail ETF, how exactly does that come about? Because most of your products I really don't see falling into that category up a second or third or fourth launch in an already kind of crowded area of the market, so how did that those products come about where they just kind of created for specific clients or where you attempting to do something different there, you know a twist on something that existed already?
EL: Yeah. Each are kind of different. The OUNZ or the VanEck Merk Gold Trust, which is a bullion-based ETF or ETP if you will…
JL: That's a trust. Yeah, sure.
EL: Yeah. Quite honestly, I think it was revisiting a past miss. I think in the early days when first-to-market wins was kind of the philosophy, [bullion products] were out there, I think the thought of entering with another [bullion product] maybe, we thought that we had opportunities in other areas, so we never really visited it, but being a shop with a long legacy in gold, we thought it was important to have, and we wanted to do something that was differentiated. So, it took us a while, we were looking at different bullion products at that time that we - that the opportunity to partner up with Merk came about and Merk had this interesting twist to their product that allowed for deliverability of bullion and we thought that was kind of a neat little feature that kind of gave the power back to investors to be able to take control of the bullion if they wanted it. And so, we decided, let's put that out there. We had diversified our products quite a bit by then and so it may just add a strategy, which was kind of a natural add on to our other - to our product set.
JL: Sure, just one out of curiosity because, you know, you hear about the deliverability thing, has anybody ever take - like two people actually take deliverability on it, I'm curious about that?
EL: We haven't seen a lot of that. I think we've done probably a couple of tests, but there hasn't been a lot of that as of yet.
JL: I guess, I guess it's the idea theoretically that you could in case of an apocalypse or so. [Indiscernible] that sort, I mean not sure you would be waiting around to collect your gold at that point, so I guess theoretically at least?
EL: And then the other two examples that you highlighted to retail ETF RTH and ISRA were not first to markets, but they were improvements if you will. So, we also look for opportunities to improve. So, our RTH, I don't know if you remember the old holders' ETFs, BBH, PPH, RTH, these were in a …
JL: Speaking of delivery, I believe you could break those up into their separate components and take delivery on the components also in those cases.
EL: Yeah. But they were in an inferior structure that didn't really rebalance or what have you and over time you just ended up with whatever stocks were locked in the portfolio. We thought there was an opportunity to take advantage of these trading vehicles that had great trading volume, they are great as a trading product, but convert them into a [indiscernible] product that allowed the ETFs to have more consistent profile and diversification profile. So, that was, that attempt to take those over and improve the structure around them and ISRA, the Israelis ETF really speaks kind of to our philosophy around our country funds in general too. Again, kind of going from a, they keep calling like a historian perspective because I heard Jan van Eck talk to our sales team recently about the other, you know there is academics and then there is historians and I think a lot of the early ETFs were based on academic benchmarks.
Just cap weight indices, no real caps or concerns necessarily about diversification, and so in some countries you ended up with, particularly emerging market countries you ended up with exposure to really, really large names and if you truly go for country exposure, particularly in some emerging markets, you end up in these large multinational, global multinational names that might already have exposure to the global economic landscape already that your U.S. large cap stocks have. And what you are really after when I think you are trying to target countries is that local dynamics. That local flavor, and you tend to get that more in smaller cap names, you know the fact our actively emerging market strategy tends to focus on smaller cap growth opportunities.
When we've worked on our country funds in the past, we've looked to provide exposure to the local market in a way that was diversified across the market cap spread when we did that to constituent caps that enforce that, and then when the Israel opportunity came up, it was that opportunity where there was a fund already out there that had basically based on the cap-weighted index had a huge - at that time, I think had a huge amount of exposure to TEVA, basically over-weighted the portfolio into the Top 10 names…
JL: We all know how that's worked out for investors... not very well.
EL: And so, it was an opportunity to introduce an ETF that had on an economy that's a very dynamic economy and in a way to bring it to the market in a way that matched our overall philosophy for country fund investing. And we had a great partner with that, with Bluestar indices who's also a big component and does a lot of research and…
JL: Oh, yeah. Sure. I actually had Steven Schoenfeld on maybe two months ago, yeah, and so correct, we spoke a lot about this fund, and I mean if you look at how many holdings are in it relative to the other Israel ETFs in the space, there's nothing that's even close in terms of diversifying across that many different companies.
EL: Right. And that brings up like another aspect of our philosophy and approach, which is the Israel project like our country funds is a global product, it's a global Israel product, so it allows for companies that are actually lifted outside the borders, but have a significant exposure to that economy and in different markets that plays out differently, but that was, I think that's one aspect of Israel, which is nice as well.
JL: Yes, definitely. Just looking at your lineup of country funds here again, you really are focused on areas that have not really been covered elsewhere so you have got to Vietnam ETF, you've got Brazil small cap, India small cap, Egypt, Indonesia, Russia small cap. These are in Africa index. These are obviously segments of the market that, if VanEck hadn't rolled out these products, they simply probably wouldn't be available for most U.S. retail investors certainly and probably not most RAAs or FAs; either you have to be on the institutional side to get access to many of these things?
EL: That's right. That's kind of what we're trying to do is provide access to different opportunities and democratize that access through an ETF.
JL: Sure. And you had mentioned, you know, the move broadly speaking towards smart beta or factor investing whatever you want to call it. I noticed you at VanEck you haven't really gone down that route and I'm just curious why you haven't gone that route, why you've taken a different approach?
EL: I have a love hate relationship with the term smart beta. I think it is great…
JL: Join the club, it is nonsensical.
EL: It's a great simple term to explain something that's based on an index, which took a little bit more thought. I think it's been hijacked by discussions of factor investing a little bit, but to generalize it, I will say, we've been in the smart beta business for quite a long time. Actually, we haven't really marketed it that way, but the indices that we've used in our ETFs have been crafted with the markets that they're trying to target in mind. And maybe it's as simple as allowing for offshore names of the country fund or putting constituent caps on, but then you get into other things like our investment-grade floating rate note, ETF FLTR, it was the first of its kind in 2012 when everybody was crazy about bank loans, but we did an investment-grade, kind of almost money market like or cash equivalent type product that was supposed to benefit from rising interest rates. That's actually kind of a smart beta index before smart beta was - has been really thought of in fixed income.
Now, we looked at the market there, we looked at how the - those notes traded and operated. And we found that we could rewrite things to tweak the yield without affecting the interest rate duration profile. So, that was kind of a smart beta approach. And we've had our dalliances in traditional factors or smart beta. We had some emerging market quality and quality dividend products a few years ago. Unfortunately, I think, we launched those probably at the wrong time. And one of the other things that came out of that was kind of the difficulty and communicating the message, because if you look at different factors, everybody's got a different definition of what quality is or what value is. And it was hard to kind of sync that up with what people were expecting all the time. So, I think, when it comes to straight out factor investing are we - our approach has been, again, to just really focus on what we're trying to accomplish out of the asset class more so as opposed to saying, oh, it'd be really cool to have a momentum ETF or a growth ETF or a certain factor, like okay, what are we trying to solve for? And so, in that regard, we have smart beta ETFs, which are providing different solutions in different ways. They might be affected by different factors or have different factor exposure, but factors themselves or have not necessarily been the driving factor.
JL: Yes, nice. Yes, don't get me wrong. I mean, I've actually myself, basically shied away from factor indexes, just because I think that a lot of the hype around them, I think was premature. And as you said, every one of them, even they may have the same name, but you could have five different value tilts that are all looking at something different, for example are waiting differently. I've tended to myself just kind of focus on a cap weighted or equal weighted indexes, if I just feel that I like the constituents better, and then go more into the thematic direction to things that I think just have to be more valuable as a sector industry in 10 and 20 years from now.
So, things like cybersecurity, water tech is a bunch of different directions I've gotten there. But yes, it wasn't - definitely wasn't meant as a criticism that you haven't been the 20th issuer to release a momentum fund a low vol fund or something. Just was curious, because it seems like everyone else jumped on that bandwagon. VanEck is kind of stuck to its guns and continues to release huge products that are not simple academic factor-driven funds. So, I found that interesting if nothing else?
EL: It was a great question and I appreciate it. We've - there are other areas like ESG, where we've kind of taken our time on. ESG is another one of those things where there's so many different methodologies and which one is the right one and who's - people that have different approaches. Some people like to just focus on the E or the S or the G in a different way.
JL: Yeah. I know that. I mean, that, that space is almost totally inscrutable to me, at least, at this point. I mean it's very difficult to make heads or tails of what all the different strategies are and how they end up with such large weights and some of the companies that they have weightings to?
EL: And to your point, I think our approach to date like your own personal preferences to have been to kind of target certain thematics that were just maybe a little bit more direct in terms of the impact you wanted to try to affect through ESG investing or what have you, but I think if we do an ESG labeled ETF, you will know that we have thought a lot about it.
JL: Nice. I like that. We'll be back after a brief word from our sponsor. So, you made a decision as a firm several years back to start self-indexing via a sister company you created and the index solutions for MVIS. So, first of all, was this just about cost cutting, or were there other benefits you were looking for? Also, and then how do you make the decision of when to self-index versus going with a third-party index, something you still do in many cases?
EL: Yes. I - it - I think really grew out of realizing that we were customizing a lot of indices. When we started doing our country funds, they were third-party custom indices. And then we started doing some of our commodity-oriented or hard asset funds and they were custom indices. And I think we finally realized we're giving away our philosophy and intellectual property to have somebody else calculated index, why don't we just do it ourselves. But running an index shop isn't necessarily cheap. Maybe they can license the index to the advisor more cheaply, but then they still have a lot of data requirements and they are an index, they are a business and of themselves. It's the MV Index Solutions, or MVIS, based in Frankfurt. They are a subsidiary and they also have other clients.
So, their sponsor is typically in Europe, some in the U.S., but yes, it was more of an idea of kind of controlling your own destiny, if you will there with the deciding to go with custom indices or an index subsidiary. On the question of when you decide, when we decide, how to go with them. They've been great for pretty straightforward equity ideas, giving them hard asset or thematic place or country funds, have a lot of data behind that and pretty straightforward. There are other times where people come to us with an idea and maybe that person has some following around their research, say, for instance like Morningstar, you know with the Wide Moat research. That would be something that where there's a certain expertise and we'd bias towards the - that provider that has that expertise behind it or sometimes we get pitched an idea and we hadn't thought about it before. And if they were the first one to present it to us and they have an index ready to go, then we would even if MVIS could build it, we might give them the first shot at working with them to bring idea to market.
JL: Yes, sure. No, that definitely makes sense. And then I guess, there is a false separation there in terms of - there's always the concern when a firm is self-indexing, that there's - there might be some biases and back testing or whether there may be changing up the overall philosophy to kind of retro fit data there, which is - that that's one concern you don't have to have if the issuer of a fund is totally detached if they're using a Russell or a FTSE or MSCI, but it sounds like in the case of MVIS, there is a full Chinese wall so to speak between VanEck and what their operations are there, correct?
EL: Yes. There is Chinese walls. And in order to get that relief initially, we had set up the procedures and those firewalls between MVIS in our shop. And - but they operate pretty much like any other index provider operates with us. So, they will publish any index announcements to the public or to their subscribers at - all at the same time. So, we don't get any advance notice to that, particularly there's some extra hurdles that we've had to go through in the past, where if we're launching a brand-new fund with a brand-new index, we'd make sure that that index was out there live for a few days, I mean I think maybe a week, I think is what the requirement was in advance so that people could see what the holdings were and get used to it and be fully transparent. We've taken a very transparent approach to our self-indexing business.
JL: So, before we get into a couple of the - these specific funds here that we mentioned earlier that I'd love to dig deeper into, I just figured I had to ask, you have among the most creative ticker symbols in the ETF space. What is the naming process look like exactly like a - I'd love to see the whiteboard in the room there when you're coming up with a new fund throwing names around what is that process like exactly to come up with some of these ticker names?
EL: It is, let everybody contribute. I think that's the process. It's like we'll send out a notice of, "Hey, we got this idea. We need to take your idea." And everybody gets to contribute generally. Sometimes, we can come up with it and start to circulate it. I think the most important thing is having the valve in it, making it almost a word. We try to do that, which is possible.
JL: Sure, yes. No, that makes sense. And makes it pretty easy to remember like a lot of your country fund names or bunch of your bond funds, (FLTR), you mentioned earlier, (ANGL), (MORT), (DURA), I mean, these are just - they're so easy to remember. So, it's pretty great on that front also.
EL: Ad those famous one is MOO.
JL: Yes, MOO. I was going to say, yes, that one is great. Absolutely. I guess KOL is up there also?
EL: Yes, exactly. That's a - that's an oldie, but a goodie.
JL: Yes, definitely. Okay, great. So, delving into some of the specific funds here, I'd love to start with two, I think, your two largest funds by asset under management and I think your two most followed funds on Seeking Alpha also GDX and GDXJ. So, the larger cap gold miners and then the junior miners. First of all, I was saying earlier, so GDX has 73,000 followers on Seeking Alpha roughly and GDXJ has another 33,000 followers. So, really heavy investment interest on funds that are niche to some extent. You're not getting any broad betas or equity exposures on these funds. You're getting a very specific slice of the market, but there's obviously a lot of interest in them. So, both of these funds have crushed the S&P 500 on a 12-month basis, while significantly underperforming the broader market if you go back to the three, 5- and 10-year return periods. Gold has clearly become a very popular play in volatile markets. What's the case for miners continuing to outperform the broader market on a forward basis?
EL: Yes. I think our case right now, where we are in the economic cycle is increasing financial risks. kind of given the long bull run that we've been in. You got over 17 trillion and negative yielding debt. So, it's a kind of aging financial cycle that I think could really help gold in the long-term. And we help that we think that could help gold in the long-term. And then over the last since 2011, really it was last, when the last kind of bull cycle kind of ended for gold. A lot of the gold companies have gotten their books cleaned up. They're taking a more diligent approach to their business, trying to develop brownfields as opposed to new Greenfield or taken on a bunch of M&A activities, which got them in trouble in the past.
JL: Sure. Yes, that makes sense. And I guess, do you attribute this run out mainly just to gold running up itself? I mean, they're not always directly connected if you look at it. Historically, the price of gold can be going up and these miners can still not - they can be lagging or vice versa?
EL: Yes. I feel like those correlations have broken down a little bit over the years. I think we still kind of believe in the mode of the long-term. The price performance -- I think this year, it's interesting. I think it really kind of started to take off after the Fed cut rates, again, and did a kind of U-turn on rate direction. I think there's a subset of people that perhaps that believe probably enough people on both sides I think that the economy can keep going or the others I think that the -- we can't keep doing this. We can't keep going towards negative yielding debt and piling on all kinds of liquidity into the market. So, I think gold this year has benefited from the change in interest rate direction, as well as just generally good gold for equity market, particularly for gold miners.
JL: Yes, for sure. Okay, so I'd love to move over to ANGL, another one of these great ticker symbols, the fallen angels Bond ETF. The stated objective of this fund is to take bond issues that were credit quality rated when they were first put out on the market, and then that had been downgraded since then. Performance has obviously been there for this fund. You've got a five-star Morningstar rating over its lifetime. Just curious for myself and other people that are less familiar. What is it about this strategy that that works here? Like I would think just logically, once something's been downgraded, I would think that the odds of it actually going belly up that company would be increased significantly enough that there be enough defaults in this kind of a portfolio to offset the additional interest you get out of it. So, what is it about this strategy that works?
EL: It's old school investing. Really, it's like buy low, sell high kind of old school investing. It's a value strategy. There was one in fixed income.
JL: I was going to say, you can call this as a smart beta?
EL: Yes. I mean, there's this dynamic that that happens in the marketplace, where investment-grade bonds and they were issued as investment-grade bonds, when they get downgraded investment-grade managers by their investment policy have to sell them. So, there is this dislocation, I guess, if you will, in the market by that kind of forced selling, which this ETF via its index tends to pick up on. And what's interesting, yes, these things have been downgraded and you would think everybody wants to run to the hills and avoid them, but their downgrade has almost been telegraphed for six months prior to inclusion in the index. And you can see their price deterioration before it actually ends up being downgraded and then eventually in the index. And some of the performance comes from that price appreciation that we can capture, because they come in at a discount, plus the yield.
One of the great things about and that we've been talking about lately is that you can get approximately the same yield out of a fallen angel portfolio, as you can a broad-based high yield portfolio, but you also pick up. You also have, I should be compliant here, you also have picked up price appreciation. So, that's why this strategy tends to, I think has outperformed over the many years. You've got that little value kind of tilt to it or bias, if you will, to some oversold names. You get the yield from high yield. And that's what's kind of cool about. It was originally, but I think this type of strategy, a fallen angel strategy is what high yield investing originally was like back in the Michael Milken days. That's what it was. Only after when people found that that strategy was successful, then did they start allowing original issue high yield. Companies coming to market with a high - the high yield junk rating to begin with, but this is just good old school fashion investing, I think.
JL: Yes, sure. No, that's cool. And what are the rules of the index? Are you obligated to sell something if it gets upgraded, again, by the ratings agencies? How does that work exactly?
EL: Yes. So, if there are rising stars in the portfolio and basically, majority of the rating agencies have upgraded the issue, then they will sell the bond out of the portfolio. The index will rebalance on a monthly basis. So, we're reviewing that portfolio monthly.
JL: Got you. But I guess, that is the dynamic, where you're selling high at that point. So, it's not really problematic from a performance standpoint.
EL: Ideally, you're selling above where you bought it, yes.
JL: Sure. Yes. Okay. So, I'd love to move over to the Morningstar Wide Moat Fund you spoke of earlier, and you actually have two, you have an international one also, which has gathered relatively little in the way of assets relative to the U.S. one. So, I just was curious about the overall strategy here. Investing in companies with recognizable moats is a concept first, popularized by it's - you know attributed to Warren Buffett, it's a value type concept in general. But I would say that identifying whether a company has a real moat or not, seems like somewhat of an intangible kind of like valuing a company's brand, which again is very hard to attribute a real value, too. So, I'm just curious how Morningstar, or from like that, like, how do you get this into indexable form? Or is there a lot of human research going into the components of the index here? Or is this something that is possible to actually just crunch numbers and figure out?
EL: This one - we really draw upon the equity research expertise of Morningstar. They have over 100 equity analysts globally, covering something like 1,500 stocks globally. So, if you think about that, probably on the largest equity analysts team on the street and Morningstar over the many years that they've had their moat rating business have implemented a process of repeatable and proven process for evaluating companies assigning a certain moat rate, whether it's a narrow moat, wide moat, or maybe they have no moat and an evaluation component. They have a price to fair value, kind of valuation metric that goes into the moat strategy. There's a whole process. They have a moat - economic moat committee. Their analysts have to go pitch the team. And the team is comprised of experienced analysts, and they have to fight for their ratings. They get evaluated on their pics over multiple year time frames. And that process has worked. I think it's easy enough to say kind of like the whole Buffett strategy of find a good company, buy it at a good price. It's harder to do. And I think the Morningstar team has done extremely well because of their repeatable process. So, they do that over and over again.
JL: Yes, sure. No, that's interesting. So, it really is - there really is a lot of human capital going into constituting this index, it sounds like?
EL: Yes, yes, absolutely.
JL: But through a broad review process, where let's say, analysts that have been less effective at doing this are kind of filter it out of that, that part of the process and you end up with kind of the cream rising to the top there in terms of the analysts that are continually evaluating, which companies have their deepest moats?
EL: Right, right. And I think just over time, the process is there, particularly in the benches there in case, analysts do leave. They have been able to show that they can repeat this process very effectively for the strategy.
JL: Yes, sure. So, why is it do you think that the international equivalent of this fund, BATS:MOTI is the ticker symbol. The U.S. one is MOAT, another one of those easy to remember ticker symbols. Why do you think the international has gathered so few assets relative to the U.S. one is like a $3.2 billion fund, the international one is tiny, compared to that? Why do you think that is?
EL: Yes, that's a newer fund that we launched in 2015.
JL: I was going to say it's not that new at this point.
EL: Right. It's been around with it. Yes, true.
JL: Yes.
EL: I think the timing of when we launched, it was probably not great. I think, it's, it's ex-U.S. The U.S. market has continued to scream some of the international markets. I think at the time that we launched it to, you're still dealing with some of the knock-on effects of kind of European financial crisis stuff. And so, I think that that was kind of a strong headwind to go up against. If things change and there's a rotation from U.S. equities, more international equities and more interest in that space, I think, it'll show pretty well, but I think it was just kind of a matter of timing there. And the relative level of interest in international maybe more of a home bias, kind of aspect where U.S. investors, I guess, every investor locally does have a local home bias versus international investing.
JL: Yes, yes. No, that's definitely been shown to be the case. Alright, cool. So, before we go here, I'd love you to be able to discuss a couple of other innovative products that you think investors are maybe less aware of in the VanEck stable of funds. What - anything on your mind you wanted to bring up?
EL: Yes. I mentioned it a little bit before, but I'll give another pitch on this, because this one, we're getting a lot of great questions about people are interested in, maybe because it's just a novel to some people, which is ESPO. ESPO is our VanEck Vectors video gaming and e-sports ETF. And if you've never known e-sports were, you would be surprised that how many people will sit around and watch other people play video games. And we - when we first learned this idea about a year ago, we saw all the headlines of the media coverage of it. And that intrigued us initially, definitely, that you could sell at the Barclays Center, 25,000 seats two nights in a row, but as we dug into it, it was just kind of the tip of the spear in terms of what's happening in the whole media and entertainment space.
Video game makers are transforming their businesses from game as a product to game as a service, free games, but in-game purchases, they're going more - they're using mobile more for advertising. e-sports is another method, where the whole e-sports arena or ecosystem is being built, almost a model traditional sports where you have local teams, you have buy-ins in terms of franchise fees, you have media rights, there's e-sports streaming services that buy the media rights from the publishers. So, there's a whole new business model for video game publishers in the space, that it really kind of piqued their interest and we thought was really interesting. And all that on top of the fact that those that are interested in e-sports are of an average age of 29. So, they're under 30. They're - the average age is older than just teenagers. So, they're people presumably making money. And if you think about it in the context of the cord-cutting culture, there could be a potential long runway here, where people are increasingly going online to find interactive content and video gaming and e-sports kind of fit right into that.
JL: Sure, yes. So, what sorts of companies are in the portfolio there, just curious? Is this nontraditional gaming companies like Activision and Electronic Arts or…?
EL: You have a lot of them.
JL: Okay.
EL: Yes. I know you have at the top of the stack, you have the video game publishers, which we think are kind of the leading the e-sports, or the top of the pyramid, if you will, in terms of the e-sports.
JL: I see Nvidia (NVDA) is actually the top - Nvidia and AMD are actually the top holdings, which is interesting, because they're, I mean, I guess it's for their processing devices that they make, or is that just curious what the composition here in the indexing philosophy?
EL: Yes, we will include companies that generate 50% or more of their revenue from video gaming and/or e-sports. And that can be video game publishers. That could be streamers. That could be, as you pointed out, hardware makers like Nvidia or AMD provided we can attribute or the index shop can attribute that they earn a majority of their revenue from that space. So, you'll have those in there and obviously, they will jockey for position in our portfolio inter quarters will be a quarterly rebalancing.
JL: Right. Okay, so it's - this really is a pure play even, let's say though a company like Microsoft (MSFT) may have a $30 billion or $40 billion a year business in its Xbox division that's still very far from 50% of their overall business. So, they would not be included here, obviously.
EL: Exactly. Yes. Thanks for asking that question, because they're making that point, because it really goes to the philosophy of our ETF craft, if you will, or craft an ETF for the marketplace. If we want to do something in a thematic approach, we're going to try to do it as pure as possible and we define purity by the revenue, like being able to generate more than 50% of the revenue from that space and it works out that. Yes, even though Microsoft is big in the space, Amazon via its streaming platform, Twitch is big in the space. Video gaming is not a big part of their businesses, and they are affected so much more by other factors. And we'd argue that big companies like that if you already have a large capital equity ETF, you probably already have exposure to the Amazons or Microsoft's of the world. So, if you want a thematic approach, you're looking for differentiation, something that's going to add value to portfolio and be a little less correlated to everything else that you have. So, that's one of the reasons why we had that, that hurdle - that revenue hurdle for companies and one of the reasons why there are some popular names that you might expect that are not in it.
JL: Sure. No, and it makes a lot of sense if you think about it, because if you - if you're buying a niche fund for exposure to a specific theme, it's a real pity if, let's say, Microsoft, Xbox has great year-over-year results, but the stock sells off, because they have really crappy quarter in terms of their office suite or something. So, really, the fund ends up not performing in a way that reflects what the actual underlying theme or niche is showing, because there's so many other factors there when a company only has a small percent of its revenue derived from there. So, yes, that I think it's definitely appreciated by investors that want actual exposure and not just a name on a fund, which doesn't really offer the stated exposure?
EL: Exactly.
JL: Alright, great. Anyway, this has been really awesome. I've really enjoyed this conversation. I'm sure our listeners will, too. Before we go here, where can listeners go to continue researching these funds and related topics online if they want to?
EL: Our website at vaneck.com has a wealth of information. The product pages are full of info about the indices or the strategy. And then I would check out our blog section, too, which is broken up by different topics, whether you want to follow gold and our gold strategists, or you want to get general updates on ETFs tons of information there. Listeners can also find me on Twitter. I'm trying to get out there a little bit more on the Twitter side of things. I'm - my handle is @thatEdLopez.
JL: Nice. I like that. I'm going to look that up right now as we're winding down here. And then is there a place to follow VanEck on Twitter? Also, I assume I think I'm probably actually following them.
EL: Yes. Yes, we're on Twitter as well. I'm going to find that handle [indiscernible].
JL: Okay, @thatEdLopez. Okay, I'm actually following you already, to be honest, as of probably a day or two ago, while I was preparing for this. Yes, VanEck is @vaneck_US, I think the one that people are going to want to follow here.
EL: That's right.
JL: Excellent. Okay. And new video with you on VanEck, who is also follow - followable on Twitter, I see. Alright. Anyway, Ed this has been a real pleasure. I hope we can do it again sometime.
EL: Yes. Thank you very much. It's great to talk to you.
JL: Yes. Yes, you, too, and happy holidays. Best of luck in The New Year.
EL: Thank you very much - to you as well.
