Editors' Note: This is the transcript of the podcast we posted on July 30, 2020. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.
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Jonathan Liss [JL]: For reference purposes, this podcast is being recorded on the morning of Wednesday, July 15 2020.
My guest today is the CEO of Global X ETFs, Luis Berruga. Luis joined Global X in 2014. He is responsible for advancing Global X’s leadership and providing intelligent investment solutions. In doing so, he leads the organization of the senior management team to drive execution across all areas and planning and implementation of the firm's strategic vision.
Prior to joining Global X, Luis served as an investment banker in the financial institutions group at Jefferies, where he advised the board of directors and executive management teams of public and private companies on acquisitions, divestitures and capital raises. Prior to that he was at Morgan Stanley where he focused primarily on technology and operations strategic planning within the Wealth and Asset Management Group. Luis earned his MBA from The Kellogg School of Management at Northwestern University.
Anyway, enough of an intro, welcome to the show Luis.
Luis Berruga [LB]: Thanks, Jonathan. Thank you for having me.
JL: Yes, it's truly great that you're here. I'm a big fan of Global X. And what has been for many, many years, I think one of the great niche issuers in terms of Thematic’s, and different ways of slicing and dicing some of the academic work that's been done that's been referred to as factor investing, as well as in the dividend space, and income generation in general. So, truly great that you could be here.
LB: No, thank you so much for having me. I'm really excited to talk to you about Global X and some of the more recent developments in terms of cloud development and some of the very interesting things that we are doing in the context of global distribution and also in the context of Thematic investing.
JL: Sure. So, you started out on the investment banking side of the business. And six years ago, you pivoted over to exchange-traded funds when you join Global X. What was it about the ETF space specifically that drew you in?
LB: I mean, to be honest, I think it's a passion for the ETF product itself. Like you were saying before Jonathan, even before investment banking, I worked at Morgan Stanley in Chicago within their Wealth and Asset Management Group. And in that role, I really had a chance to dig deep into multiple structures and investment styles, right. So from a stock picking to mutual funds, closed-end funds, UITs, annuities, and of course ETFs. And the more that I learned about how ETFs work, the more convinced I became over the many benefits of the ETF structure. I was truly fascinated by the elegance of the ETF structure as an investment solution, because think about it, Jonathan, right.
So, you have easy access to dozens if not hundreds of companies around the world. In just a single trade, you have liquidity you can easily buy and sell throughout the day in the secondary market. If you are an institutional client, and you need to trade large blocks of shares, you can do that in the primary market through an authorized participant. You also have, you know, tax efficiency, you know, things to the custom basket and the creation redemption process.
ETFs tend to be more tax efficient than mutual funds, which at the end of the day, that means, you know, money in the pocket of our investors, right. And last, but not least, you know, typically lower the cost, you know when I was looking into ETFs, you know, 10, 12 years ago, like it was mind blowing to me, seeing some of the difference in the cost structure of ETFs versus other investment vehicles. So, when I saw all of those benefits put together, it became very clear to me that ETFs were ready to disrupt the asset management industry, and they did, right.
So, if you look at assets in ETFs, like, you know, 10 years ago, it was not even a trillion dollars in AUM, and when you look at assets in the ETF industry, just in the U.S., it's about $4.4 trillion in AUM. So from that standpoint, obviously, being part of a fast growing industry that is really contributing to democratize investing around the world. I think it's a very fascinating story and I definitely wanted to be part of that.
JL: Yeah, absolutely. It really is an amazingly elegant piece of financial engineering, the exchange-traded fund, there's no question about that. And certainly some of those things that are touted as features like the ability to trade intraday can be double edged swords for many investors. So, you have to know yourself a little bit in terms of are you the kind of person who's likely to panic sell when you hear a bad piece of news? If so, maybe you need to keep your investments at a little bit more of an arm's length. Maybe the very least not keep your brokerage app on your phone so that you can't, you know, panic sell in between meetings or something like that, but yes, on the whole, I agree.
I think the reason ETFs have continued to grab asset share is because they are in many, many ways a superior product, as you say, whether it's tax efficiency, low costs, the ability to deliver access to asset classes that maybe were not available in other types of wrappers like mutual funds or unit investment trusts. So yeah, certainly it's still a growing story and one that I think will continue to be a growing story for decades to come because there's a lot of assets still in mutual funds that can end up in exchange-traded funds, eventually, there's a long way to go there.
Okay. So, two and a half years ago, Global X was acquired by Mirae Asset, which is a Korean based global financial services firm. How was the transition from a small entrepreneurial firm, which Global X was previously to being part of a global financial services entity of significant size? And what's your focus been since the acquisition?
LB: I mean the reality is that the transition has been very, very similar. And I think it's mainly for two reasons. One is that, you know, both firms have a very similar D&A in terms of having a passion for innovation, and for bringing disruption to the capital markets. And I can give you a few examples, right. So, Mirae Asset the acquiring company is very well-known around the world, but specifically in Asia is very well-known as a permanent innovator. And I can give you a few examples, right. So, they literally to market the very first retail mutual fund in the history of South Korea, back in 1998, or more recently, they just signed a deal with one of the major social media platforms in South Korea called NAV, right.
So, if you look at the Global X, we follow like a very similar path, right. So, right now the company was founded in 2008. We launched our very first ETF in 2009. And we were the very first company in the U.S. to bring a thematic product when we launched our Global X Lithium & Battery Technologies ETF (LIT) back in 2010.
JL: Yep, I remember that well.
LB: Yeah, that was and is still a phenomenal product, is doing very, very well this year as well. In 2011, we brought to market the first Social Media ETF and I think it's still pretty much the only pure play Social Media ETF in the U.S. We were also one of the first companies, ETF companies in the U.S. to establish monthly distribution of dividend. So, the fact that both companies share like a very similar D&A, when it comes to product development has definitely helped.
Also, you know, from – more from a social standpoint, you know, both firms have a very similar entrepreneurial mindset because you are absolutely right, Jonathan. I mean, Mirae Asset is now like a fully diversified global financial services firm with local persons in nearly all major markets, but don't forget, I think it's very interesting that Mirae is still founder run company. I mean, the company was founded in 1998 by Chairman, Park who is still very much involved. He's a great guy. And basically means that, you know, the company is just 10 years older than Global X.
So, when you look at what they have accomplished in just a little bit over 20 years is pretty remarkable. I mean my opinion, that it speaks to a culture of thoughtful, but quick decision making and execution, which at the end of the day is very similar to what Global X has always been about. Now, in terms of some of the things that we've been working on since the acquisition, obviously, we've been much more active from a global distribution standpoint that was the low hanging fruit because Mirae again, has presence in all major markets.
So, we've been working very closely with them to explore some of these global distribution opportunities, and then, of course, a product development. I mean, we've expanded our Thematic investing family of products. As you may know, we launch our cloud computing ETF in April of 2019 and has been very good success for us is quickly approaching a billion dollars in AUM and is became definitely a flagship product for us, and quite frankly around the world when it comes to cloud computing exposure.
On the income front, we've expanded our Covered Call strategy is one of our fastest growing ETFs of the last couple of years has been our Global X NASDAQ 100 Covered Call strategy, QYLD, which is now well over a billion dollars in assets. And in December of 2018, we launched a full suite of China Sector ETFs. Our view is that China has the second largest economy in the world, with an increasingly diversified economy. We don't think like the [plain vanilla] exposure to China is enough anymore. So, we wanted to provide our clients with the tools to take a more nuanced approach to investing in China. So, those are some of the things particularly global distribution and pro-development have been the main areas of focus since we were acquired back in 2018.
JL: Sure, and just out of curiosity, because as a U.S. focused investor myself, I maybe sometimes have a bit of tunnel vision in terms of the global ETF picture. How many exchanges are Global X ETFs available on currently or are they being issued through a different wrapper, maybe the Mirae wrapper and other places, just curious, like I know BlackRock (BLK), you know, you can buy a BlackRock iShares ETF on probably a 100 different exchanges at this point. What does the picture look like for Global X?
LB: So, in terms of actual cross listing of our ETFs, we have some of our ETFs listed in Mexico. So, we have some ETFs cross listed in Mexico, because we have a partnership with one of the largest independent financial services firms there, but our strategies are available in multiple markets. As part of the Mirae Asset Global ETF platform, Mirae has obviously Global X hitting the U.S. but we also have an ETF business in Canada under the brand Horizons ETFs. We have Tiger ETFs, also in South Korea.
We have beta shares in Australia, and also Mirae has a very fast growing ETF business out of Hong Kong. And this is the one business where we have seen a ton of opportunity for us to work together because there is a lot of interest in ETFs, but more specifically in Thematic ETFs coming out of Asia. So, recently, we've rebranded the Hong Kong ETF business as Global X by Mirae Asset. We work very closely with them where we have them with [indiscernible] development, marketing and research, and they help us with distribution.
Another market where we've been having significant success is Israel. We have great clients in Israel, very sophisticated clients, and quite frankly, is one of the most dynamic economies in the world. They really understand technology and that's why I think they are definitely very interested in our cinematic products. And last year, I don't know if you saw the news, but last year, we established a joint venture and received a significant investment from Diverse Securities. Diverse Securities as you know is one of the largest and most reputable firms in Japan. They have a global footprint, but obviously, they are particularly strong in Japan.
So, we sign this joint venture and the whole idea is for Global X to bring Global X branded ETFs to the Japanese market. So, if everything goes well, Jonathan, not going to work because definitely COVID-19 has slowed down our ability to execute, but if everything goes well, we'll be launching our first thematic ETFs in the Tokyo Stock Exchange later this year.
JL: Wow, fascinating, interesting because when Global X was founded, I really think it was a U.S. only firm and the global part of the name was really just the fact that you were bringing so many thematic and niche funds and I remember, I don't think they're even around anymore, but lineups of different slices and dices of emerging markets, you still have some of them. And I think at this point, the global X has a double meaning and that you have a global footprint at this point also. So, that's really fascinating.
LB: No, you're absolutely right, because one of the things that we've learned since we were acquired by Mirae back in 2018 is that ETFs are not just a U.S. phenomenon, I mean they are really are these relative global trend themselves. And it makes sense right? Because at the end of the day, the ETF structure is optimal for the large majority of investors, right. Obviously, if you are very high net worth investor, you may want to add private equity and venture capital to your portfolio and things like that, but for the large majority of investors, the ETF is a very attractive vehicle right because many of these benefits that I was highlighting before like, you know, low cost tax efficiency, transparency, they translate very well to all other markets in the world and we are seeing significant growth.
Like I said before, a lot of growth coming from Asia, but quite frankly, in other markets like emerging markets like India, Mexico, or Brazil, there, there is a significant amount of adoption of ETFs and now that we have the global partnership with Mirae Asset, I think it's definitely an opportunity for Global X to expand our reach International.
JL: Yeah, definitely sounds like that's a direction you've gone in and had a lot of success and so wishing you continued success there. So, I'd like to start drilling into your bread and butter, which is so many cool thematic ETFs and slices and dices on standard, plain vanilla market cap weighted funds. And honestly, I'm like a kid in a candy store just looking at your lineup of funds. It's very cool to see all the different offerings there. So in terms of different ways of thinking about how to slice and dice markets thematically, there's, you know, every firm kind of has its own approach there. Every indexer has its own approach there, broadly speaking what is Global X’s approach to thematic investing?
LB: I think it's a great question because – and it's particularly relevant in the context of thematic investing because Jonathan, you know, building thematic products is not easy, right. And I think one of the benefits that we have is that we've been doing this for a while, but here are a few things that, in my opinion, make our approach to thematic investing pretty unique, right. So, one is our commitment to the space. We've been launching thematic ETF since 2010. And since then, we have launched over 18 thematic ETFs, which basically gives us the most comprehensive thematic ETF platform in the world.
And we support these themes with insightful research by, you know, Jay Jacobs and his team, and well-designed ETF model portfolios with a whole idea of making it simple for investors to use our products. Another point of differentiation, in my opinion, is how we build our products. In terms of pure play exposure. Our thematic ETFs are designed to offer the highest level of purity to the themes that they are targeting. We set very high bars for 40 inclusions.
So there are multiple ways to do this, but we typically require that companies get more than 50% of the revenue from the thing that we are targeting. And I think this is particularly important because what we have seen is that when a client buys a robotics ETF or a cybersecurity ETF, they truly want to get a pure play exposure to the theme because if they're looking for diversification, you know, they can get that somewhere else in their portfolio. Another point that we've definitely improved over the years is the weighting scheme, right. So, what percentage of each individual company you have in the portfolio? And what we've seen is that many providers typically choose to use an equal weight approach.
However, we prefer market cap weighting for thematic investing, right. And the reason for that is that many of the industries that we invest in are still in the very early days, right. So it's difficult to know who the winners and losers will be. However, you know, what we have seen and what we have learned from the past is that with very disruptive areas like Internet search, you end up having a couple of companies like Google (GOOG) or Bing (MSFT), you think of cell phones you have Apple (AAPL) or Samsung (OTCPK:SSNLF), so what we've seen is that most of these industries are winner takes all or winner takes most.
So, we believe market cap weighting, you know, typically allows us to gain more exposure to those winners, while cutting exposure to the losers. You know, if you’re using equal weight, if you think about it, Jonathan, you're essentially doing the opposite. You know, you're selling the winners, I'm buying the losers, right. And that's why many people refer to that approach as an anti-momentum strategy and we believe it's a mistake in the context of thematic investing. And the final point is that our thematic products are for the most part, global process, right.
So when we're looking for exposure to robotics, we don't necessarily care about where the companies are located. We are looking for those companies that are most active in a given theme. And now particularly since we were acquired by Mirae Asset, I think we are very well positioned to deliver that extra value to our clients because now we have not only our research team here in the U.S., but we have research analysts in Hong Kong, in Mainland China, in South Korea, now through the partnership with Daiwa, we have research analysts as well in Japan. And if you think about it, a lot of these disruptive things, many of these companies are in those parts of the world, right. So, having that extra visibility, I think has definitely helped our product development process when it comes to thematic investing.
JL: Sure. And I think your point about pure play ties in nicely with the market cap weighting because I think probably the reason that some other issuers with thematic funds are equal weighting is that – if you think about for example, and Global X doesn't have, let's say, a blockchain technology ETF, I think for good reason because there are very few companies actually pulling in 50% of their revenue off of that space, but you think about some of those products and they'll have a company like a Facebook in their index for blockchain technology.
And then, you look at, well, what percent of Facebook's (FB) revenue comes from that space? And the answer is basically zero percent of it. And so, if they have, you know, a bad year on the advertising front, that holding is going to go down with no relation to what's actually happening to the theme you're trying to play. And so, in that case, it probably does make sense to do equal weighting because you're limiting the liability of companies that, frankly, don't have all that much exposure to the theme that you're trying to play, but in the case of your funds where you are really looking for pure play only, I think you can get away with cap weighting in a way that is impossible when you slice things differently.
LB: No, and you’re absolutely right. And maybe for context, I mean, I can share with you how we typically think about bringing some of our thematic products to market, right?
JL: That would be great, actually. I was going to ask you if you could take listeners through the process basically from ideation, somebody has an idea in the shower, maybe I don't know, all the way until the fund actually gets listed on an exchange and becomes available.
LB: I mean, what I can tell you is like, there is definitely no shortage of ideas within the Global X team. Sometimes it's just carry some more ideas that we come up with, but it's – you know, but [indiscernible] I mean, having ideas is great and that's exactly what we want in our company, right. We want to continue to listen to pretty much every single employee and we encourage everyone to come up with companies and ideas, but at the end of the day, from a thematic investing standpoint, it’s very, very important that we stay disciplined in the way that we bring products to market, right.
So what we typically do, Jonathan, is we evaluate each theme across three different dimensions. So one is conviction, you know, do we have high conviction in the disruptive impact, you know, the disruptive potential of a given theme? And we look at factors like total addressable market, sales growth rates, penetration levels, the level of maturity of the technology and then we make an assessment as a group of whether or not we do think we have high conviction on the theme.
The second point which I think is very relevant in the context of your earlier comment about blockchain is can we invest in the theme? You know, are there enough publicly traded pure play companies to invest in the theme? And this is usually a very limiting factor in the younger things, right, because we – typically in the U.S., we need 20 to 25 companies of enough liquidity to launch an ETF. And blockchain specifically is a very attractive theme, right.
We spend a lot of time as a group talking about blockchain and the possibility of launching a blockchain ETF, but when we run our analysis on our thematic framework, the reality is that there are not enough publicly traded companies that generate a significant amount of revenues from the blockchain, right. So because of that, you know, we have to stay disciplined and we decide not to launch that one ETF that things obviously may evolve over time. And if it makes sense, we will definitely revisit our approach, but as of right now, we just don't think there are enough publicly traded companies that have pure play exposure to the theme.
JL: Sure.
LB: And the last dimension that we look at is time horizon. So, we're really looking for macro level disruptive trends that we expect will change the economy and how the world works in the next 10, 15, 20 years. We are not interested in things with short life spans. And for context, if you apply this framework, you know, over the years, we've launched 18 thematic ETFs. At any given point in time, Jonathan, we are evaluating anywhere between 60 to 70 themes, right. So, it's a pretty rigorous approach that we follow from a product development standpoint to bring a new thematic product to market.
JL: Yes. No, that makes a lot of sense and it really is interesting to hear how that process goes and that it needs to check all three of those boxes. I often scratch my head at some of the thematic products that come out because when you look under the hood, you have such limited exposure to the theme on the name of the fund that it almost seems like – I don't know if I'd go as far as saying the SEC dropped the ball there, but investors really need to be wary of what they're getting in some of these products.
So in terms of the indexing side of things at Global X, and I find this very interesting, a lot of firms these days have moved to either self index or firms like VanEck are doing that, of course, or they'll work with one or two specific indexers. At Global X, you really seem to use just a huge number of different indexers, which feels like a very different approach. So, I'm just curious how that process of choosing the right indexer for the right product works at Global X?
LB: Good question. So, what we typically do from a product development standpoint is, we start by asking the question of, you know, what is the best way to deliver the intended exposure for the client, right? And to your point, a key part of this process is deciding which index provider we want to partner with for a given product. And like I said before, you know, after more than 10 years launching ETFs, we know very well that index providers have different, you know, frameworks and approaches and for lack of a better word, just trends and weaknesses, right.
So, what we've learned over the years is, for example, selective INDXX are fantastic at developing custom indices for thematic products that we’ve basically developed from the ground whereas other index providers like MSCI or S&P, they really specialize on honing in on certain geographic exposure. So again, we look at the ultimate exposure that we want, what our clients are looking for, and then we have great relationships with multiple index providers, and we ultimately choose the one that we think is best positioned to deliver that particular solution to our clients.
JL: That is really a unique approach, so cool to see it in action. And just out of curiosity, in your experience, are institutional investors using thematic ETFs differently than retail investors, and if so, how?
LB: Well, I mean an important point to make here is, I think, regardless of the investor type, particularly when we are talking about thematic investing, we think the best used case for thematic investing is, you know, for – is for buy and hold long-term growth-oriented investors. And the reason for that, Jonathan, is that, you know, many of these themes are very, very young. So, it's not unusual to see some short-term volatility. We do have a high degree of confidence that these things will succeed over the long run. But, you know, again, it's not unusual to see short-term volatility, so we always emphasize to all of our clients that that long-term mindset is important.
More specifically in – you know, what we're seeing is, quite frankly, that ETFs, particularly our thematic ETFs, are being used by all sorts of clients. So retail investors, for example, they have a ton of interest because these are tangible concepts, right. So, a retail investor can understand robotics, electric vehicles because they can see a Tesla driving down the road every single day or Fintech the way they're paying their friends or they're buying things. So these things are now part of their lives. And, you know, today, I think, you know, they want their portfolios to reflect what they know and what they understand.
An area where we've seen a ton of growth recently is with financial intermediaries, not financial advisors. And I do think a big reason for that is being COVID-19 and the disruption that we've seen particularly in all sorts of things related to the digital economy. I think that many financial advisors are rethinking how they have to build their portfolios to be able to accommodate future disruptions like what we've seen with COVID-19. And with financial advisors, specifically, we see a couple of ways in which they are using thematic ETFs.
Some of them, you know, they typically allocate 5%, 10%, 15% of their portfolio to these thematic investing ideas. Why? Because these are typically like, you know, high growth companies that are typically – you know the typical percent is very low correlation to the rest of the portfolio because, again, these things that we build tend to be very concentrated portfolio. So that's an element of diversification from a portfolio management standpoint. And another very interesting way in which financial advisors are using our thematic products is by combining our thematic ETFs with some of the traditional sectors. For example, it's not unusual to see how some of our clients have exposure to their financial services sector, but they combine that exposure with Fintech, for example, or…
JL: Sure. Yes, [indiscernible] for example, underweighting regional banks, which are, you know, probably in for a lot more pain over the next few years. So, it allows you to have your exposure to this space without being overweight those older, more legacy businesses that seem ripe for just bankruptcies or insolvency.
LB: Absolutely. And the same thing happens, Jonathan, with industrials, right. So, we're seeing a lot of people that are going more underweight with the traditional industrial sector and they’re adding robotics and artificial intelligence to their portfolio. And with institutional clients where frankly, we see also significant amount of adoption because many of these institutional clients tend to have, you know, very long timeframes and are concerned about, you know, low future expected growth rate.
So, they're looking at thematic ETFs as a way to improve the growth characteristics of their portfolio. So, it’s a long way to answer your question by saying that, you know, the actual use of the thematic ETFs may be slightly different based on the client profile, but what we're seeing across the board is that adoption of thematic ETFs in our clients portfolios has definitely grown significantly over the last few quarters.
JL: Sure. And then in terms of overarching trends that you're seeing in the thematic investing space, how has COVID-19 affected some of those trends?
LB: Well, I mean, the impact has been huge, right, as you all know, right?
JL: Yes.
LB: COVID-19 is proving to be a major inflection point for multiple themes and I think that's in two main ways, right? One is accelerating the adoption of some of these themes, and two is expanding the size of the potential markets that we are targeting. And what do I mean by that? I mean, I can give you a couple of examples, right. So, in terms of accelerating adoption of some of these technologies, basically what it means is that there are people that are [indiscernible] to use some of these technologies much faster than they would have done otherwise. And I can give you the example of Global X, right.
So, Global X, for many years, we have video conferencing capabilities, but we were not using it. We were just using the phone, you know, on conference calls and things like that or instant messaging, right. So, for many years, we thought about installing some sort of instant messaging system within the company, but, you know, we never really got to it. Then COVID-19 hits, and that Friday, March 13 we decided to start working from home and literally these tools went from being like a nice to have to being a must have.
JL: Yes.
LB: So that's what we mean by this accelerating in the adoption of some of these themes. And then, the other example is how many of these markets have expanded because these technologies are now reaching new customers that were unlikely adopters before COVID-19. And if you allow me to share like a very personal note…
JL: Yes, that'd be great.
LB: My dad and my mom, they are in Spain, they are in their late 70s, and of course, they use Internet and their cell phones and WhatsApp and all that stuff, but they have never bought anything online. And then COVID-19 happens, and as you know, Spain was hit particularly hard, and they were really scared, right, because they were definitely part of the high-risk population. So, they started to buy absolutely everything online, even groceries. And now that things have opened up slowly in Spain, they continue to buy everything online. And trust me, if you ask me, Jonathan, like six months ago, if my dad was going to be buying groceries online, I will tell you, you are crazy because he won't – he's one of those guys that likes to spend two hours at the grocery store to make sure that he has the best bananas in the world, right.
So, that speaks to, you know, how disruptive COVID-19 has been. And in terms of what we see as the biggest winners in the stay-at-home economy, obviously, are companies that provide, you know, infrastructure for the detailed delivery of products and services and you can guess the names, right, video games and e-sports, e-commerce, cloud computing, so those are some of the areas where we have seen significant growth recently.
JL: Sure. And when we get into the Global X e-commerce ETF, I would like to discuss the case of Amazon, particularly because I think that they're kind of an interesting case and that at this point because of AWS, less than 50% of their revenue comes from e-commerce and yet it would seem strange to omit them from an e-commerce ETF. So, let's – I think let's do something interesting here. I'd love to do a Global X thematic ETF COVID-19 lightning round, if that's okay, where I’ll mention a ticker and something about how it relates to what's been happening in the world since really the beginning of this year and accelerated everywhere outside of China around early March. I'll mention a ticker and you'll say something about both the prospects for that theme in the current pandemic driven environment as well as a bit about how your fund attempts to play that theme, sound good?
LB: Sounds great, let's do it.
JL: Well, awesome. Alright, so I want to start with a fund that's clearly top of mind as a result of the pandemic, and which is really, I think, showing no signs of abating and that's the Global X Genomics & Biotechnology ETF (NASDAQ:GNOM). There's talk of a vaccine of different treatments, it’s really just clogged up, not only traditional spaces you'd expect, so like medical journals, but I think everyone's kind of a armchair epidemiologists these days. So, curious what your thoughts are both on that fund and how it tries to play the theme, effectively?
LB: Well, I mean, I think it's obviously a critical theme in the context of COVID-19 and it's pretty obvious, right, like genomic sequencing has been key to rapidly model the COVID-19 genome, right. And that's important because at the end of the day, the ability of modeling the genome of COVID-19 is, you know, basically what allows for tests to be developed. And having that information will be critical in the development of new treatments and vaccines. What I think a very important data point, and I think it's a very good example is, it literally took only 12 days to sequence the COVID-19 virus, which is crazy.
If you compared that with back in 2003, when we were dealing with SARS, which was pretty similar in nature, it took literally six months to sequence the genome back then and I think that it speaks to the many, many developments and advancements in the field of genomic science. And I think the main reason for that is because the costs have come down very, very significantly in the last 15 years, and I don't know the exact numbers right now on the top of my head, but like, literally sequencing a genome used to be billions of dollars like 15 years ago, and now it is definitely a fraction of that.
JL: Yeah, I think you can get it done for like 500 bucks at this point.
LB: Yeah. It's crazy, right? So, I mean the context of why I think, obviously I'm biased, but why our genomics and biotechnology ETF is particularly well-positioned here is because it’s investing in companies that are involved in gene editing, genomic sequencing, genetic medicinal therapy, computational genomics and biotechnology. So, basically, in companies that are going to be very, very involved in testing and curing COVID-19. And probably even more important, future pandemics, because if you allow me, Jonathan like, it is a very personal view, but I do think the world was wildly unprepared to deal with a global pandemic like COVID-19. And I think politicians and governments around the world have realized that next time we need to be better, better prepared to deal with the situation, because the economic impact is just huge. And I do think companies in the genomics and biotechnology space are going to be the biggest winners of these in otherwise very unfortunate situation.
JL: Yeah, certainly, it seems clear that a lot more work could have been done, particularly on coronavirus is and that there was a real interest after SARS, but that almost all the funding dried up, as you know, wasn't in the news every day. And so companies have to be profitable at the end of the day. And so they moved on to “greener pastures” and so we didn't have the head-start that we should have had with this, so yeah, agreed there.
So, let's move over to the next fund, which I think is along the lines of a similar theme and you would mention your parents and my parents really everyone knows parents are in the same boat here in terms of that population being at particularly high risk. And so, I'm wondering how the Global X longevity thematic ETF (LNGR) fits in here?
LB: Yeah, good question. So, I mean, unfortunately, COVID-19 has certainly had a very painful and sad impact around the world and particularly among the senior population, but that being said, you know, the long term trends of people living longer and birth rates decline, still remains pretty much intact, right. And a very relevant data point is, the estimates that – by 2050, the percentage of the global population that will be over the age of 65 is expected to be 16%. Today, the number is 8%. And if you look back in 1950, it was just 5%.
So, these aging population trends are clearly accelerating. And seniors, they have unique needs, right. So they need special drugs to deal with advanced age diseases. They need special medical devices, they need special accommodations, and senior living facility. So, I think the demand for these products and services is expected to continue to grow rapidly over the next decades. And going back to your point about our Global X longevity ETF, LNGR, I think it is very well positioned because it's basically investing companies that serve the world's growing senior population.
So, we have healthcare companies, pharmaceutical companies, we have senior living facilities, basically, companies that contribute to increasing lifespans and extending quality of life in these advanced ages. And in certain regions like Japan or Europe, this trend is very, very, very accurate. And you can actually see that, if you look at the portfolio composition, you can see how you find more Japanese and European companies that you see in many of our other ETFs. So, I think this longevity trend is a very powerful demographic trend without a doubt.
JL: That's well put and interesting how you cover it from a bunch of different angles. So, you could have like cutting edge medical device companies and just traditional re-style companies in the same portfolio there. That's very interesting. So, moving over to you the next fund on the list here, there's been a lot of discussion around how if we do get to a COVID-19 vaccine faster than we ever have with any other vaccine before and I believe I saw that that the previous fastest development of a vaccine was mumps and that took four and a half years, so I sure hope we get there a lot quicker than that. But so if we do get there, there has been a lot of talk about how it will largely be because of artificial intelligence.
Your largest fund by assets under management is the Global X Robotics and Artificial Intelligence ETF (NASDAQ:BOTZ). By the way, you guys have awesome ticker names, on top of everything else. One of the fun things about ETFs, I'd love to be a fly on the wall of those whiteboard sessions when you come up with them. I'm sure there's a lot of funds stuff thrown out there, but so in terms of the robotics and artificial intelligence, ETF, what's that composition there exactly and why have you combined robotics and artificial intelligence into a single fund?
LB: Good question. So, I mean, I think that the main point is, robotics and AI are clearly playing an increasingly important role in all aspects of our lives and I think there is a very simple reason for that right? They're just getting better, and they are getting better much faster. And to answer your specific question about why we decided to combine these two things together is because they just go together very well, think about it right? So, we think about robots as being the body and they are becoming more and more capable, like the mechanical aspect of robotics, the engineering behind robotics continues to get better.
And then you have artificial intelligence, which is where we consider the brain right. And the brain just keeps getting smarter. And why are they becoming smarter so quickly, and I always like to use a very simple analogy, right. So if you think of humans. So, humans, we go through life. And we have multiple experiences and hopefully we learn and we improve, and we become more knowledgeable. And then we use all of that experience to hopefully make better decisions in the future. When you think of artificial intelligence, those experiences are data. And we are at a point in history where we are gathering more data than ever before.
And that's just about to get even better, because you have, the Internet of things, big data applications, and we're going to continue to collect more and more data, which I think is critical for the development of artificial intelligence. And I think that's the main reason why we firmly believe that robotics and artificial intelligence are going to be a key driver of future innovation and in the context of COVID-19, specifically Jonathan, I mean, artificial intelligence without a doubt is playing a key role in the discovery of potential compounds that can treat or vaccinate the disease. And specifically about how our robotics ETF is constructed, we're basically investing in companies that are involved in industrial robotics and automation, non-industrial robots like, the little robot that many people have at home to kind of vacuum their houses, companies involved with autonomous vehicles, companies that provide hardware to facilitate the use of artificial intelligence for the analysis of big data. So, we do think is a very, very good exposure to what we think is one of the fastest growing areas of the economy. And I think the numbers speak for themselves, as of right now, you saw our largest ETF with over $1.5 billion in assets.
JL: Yeah, so certainly investors agree with that take that this is a space you want to have some exposure to as time moves on here. Moving over to another sector that I think clearly benefited from the stay at home nature and the rolling lockdown nature of the pandemic, Global X ecommerce ETF (NASDAQ:EBIZ). And just curious what the construction is there because this is, I think in terms of thematics, one of the more crowded spaces, so you have Amplify funds, (IBUY) and (XBUY), and you have a bunch of other funds in the ecommerce space, and they're all constructed a little bit differently.
So, how is Global X playing this theme and what do you do with companies like Amazon that are clearly leaders in the space and yet they're not quite pure plays, because if you let's say Amazon (NASDAQ:AMZN) really takes a beating, let's say by Microsoft as you are, and AWS becomes a lot less profitable or loses global market share, Amazon could be doing really just amazingly in the ecommerce space and yet those shares could go down a lot, because they have so many other lines of business and ecommerce is not quite 50% of what they do anymore. So, curious about the overall construction there, and then how you deal with cases like Amazon specifically?
LB: Well, that's a great question. So, I think in terms of how you think our product is different from other ETFs in the space. It goes back to the main things that I highlighted before right, they modified market cap approach. Again, at the end of the day, we do think the best way to play this game is by trying to replicate the dynamics of the industry as much as possible. And we do think a market cap approach is the most effective way to do that, because again at the end of the day there will be over time in some of these industries that will be winners and losers. And what you ultimately want to do is to own more of the winners and less of the losers.
That being said, another point that I don't think I touched on before is that we do include a cap by individual holding, right. So, what we're planning to do, I think, is typically around 8%. We don't want to be in a situation where a given company, their stock price goes up very significantly, and it ends up being 14% or 15% of the fund.
JL: Sure, or the classic case of (SMH), which was the semiconductor holders, I think back in the – coming out of the tech bubble, where if I'm not mistaken, two companies, Intel (INTC) and (AMD) were something like 70% of the portfolio and it was questionable why you were even buying an ETF and not just those two stocks at the end of the day.
LB: Exactly, you're absolutely right. So we do think it's important to let the ETF to play the dynamics of the industry [with cap], right? So, typically we have an 8% cap, by falling, that way, you get kind of the best, for lack of a better expression, you get to the best of both worlds. So, I think that modified market cap weighted approach is very, very important. The second component is, like I said before, is the global exposure. So, we literally look at any company in the world that is involved directly in the ecommerce space. And this could be companies that are, their principal business model is operating ecommerce platforms or companies that provide ecommerce software and services and companies that sell goods and services online, but very importantly, again, we look at every single company in the world that is actively involved in ecommerce. And these are good example because of all of our different thematic products, ecommerce specifically is one of those that presents the most diversification from a geographic standpoint.
Right now I'm speaking from memory, but approximately 50% of the product is in U.S. companies, I think 30% or so is in China, and then you have the UK, you have Canada, you have Argentina, which has a very successful story with MercadoLibre (MELI). So that global approach I think is very, very interesting. And then you raised a very good point about Amazon specifically, right. And that's when a little bit of this background and experience that Global X has in developing thematic products is particularly important, right. So if you look at Amazon, 50% of their revenues are not coming from ecommerce.
However, these are companies that are so fundamental to the ecosystem of the things that they need to be included into product and I don’t know if you were reading In the news yesterday about for example, Amazon just developed like a new a smart card for the grocery stores to be able to legally checkout without having to go through a register, right. So they had to do all sorts of things to facilitate the ecommerce ecosystem that they absolutely have to include that one name, index portion, and then it comes down to working with the Index Provider during the product development process, and the sign and index methodology that allows for that flexibility as well.
JL: Sure that that makes a lot of sense. Along the lines of sectors that have seen a huge surge in sales as a result of the pandemic shelter in place rules, certainly the video game spaces I think are top and we’ve we've just crazy video game sales numbers month over month rolling through the pandemic here and full disclosure my kids did get a new Xbox in April, about a month into our lockdown. So, we were certainly contributors to that entire trend. So, Global X video games and eSports ETF (NASDAQ:HERO), interesting ticker symbol, curious about that actually. What's the underlying strategy there? And what do you see in terms of the future of this theme?
LB: Well, let me ask you a question Jonathan, if I may. Have you been using the Xbox or not?
JL: Oh, yes. Not only have they kids been using it, I've been using it also.
LB: I feel that explains a lot of the things that I'm going to discus. I mean, obviously, I mean, the video games and eSports industry has been very, very well positioned during COVID-19. Why? Because people look for entertainment and social experiences, from the comfort and safety of their homes and quite frankly, there was not a whole lot to do right when you are locked in a home 24 hours, it is it is difficult to entertain yourself. It's important to keep in mind that the video games and eSports industries was already like a very big industry even before COVID-19, it is really like a $45 billion industry. And it was already growing very fast. But obviously in the context of COVID-19, the growth has definitely accelerated, right.
So, if you look at the numbers from the first quarter, and it's not even the best data point, because it was COVID-19 kind of like hit towards the end of that first quarter, but the sales of a video games and eSports around the world went up by 9%. And some of the bigger names like Activision (ATVI), they actually saw a revenue growth of 20%. What I do think is about particularly important in the context of video games, and I've had multiple conversations with clients on this point is that video games and eSports, I mean the depth of the ecosystem to me goes well beyond just a bunch of kids playing video games at home.
I mean, you have the streaming of eSports. You have ad supported games, you have in game purchasing, there are tournaments around the world, they are literally professional players. And I recently was reading an article, there was a live concert inside the Fortnite video game that had 12 million attendees, which is I think it is crazy right? So, when you look at the video games and eSports ecosystem, I think historically, many investors have failed to realize how these companies have multiple ways to monetize those platforms and I'm personally a big fan of this space. Because I think not just them, the producers of video games and eSports content, but companies like Global X and many other companies are realizing that working more closely with some of these companies from an advertising standpoint, could be very, very interesting to reach audiences that is difficult to reach otherwise, and, more specifically in the context of our ETF, so you get a better sense of what exposure is.
We invest in companies that develop or publish video games, companies that facilitate the streaming and distribution of video games and esport content. And also companies that produce the hardware that is used in video games, including augmented and virtual reality which is by itself another interesting area.
JL: Sure, and I guess, unlike with ecommerce where Amazon really, you can’t avoid having them in there. I just perused the holdings. It's more difficult to have a Microsoft or a Sony (SNE) in this portfolio, even though, of course, they are the makers of probably the two best selling pieces of video game hardware. I don't know the exact numbers, so Nintendo (OTCPK:NTDOY) might be the third and I do see they're in there because obviously, that's pretty much all they do. In the case of a Microsoft or Sony, there are so many other things they do that even if the Xbox has an amazing year, you could see Microsoft not doing well on many other fronts. So, I suppose that's the reason that some of those big names have to be left out of the portfolio there, correct, to keep it pure play?
LB: Yes, because you have the revenue threshold that we were referring to before, but also like how fundamental a given company is to the video games and esports ecosystem. And I think it’s definitely like a different situation between, you know, Amazon in e-commerce, for example, Microsoft in the context of video games. So when you look at the portfolio of our video games and esports you have, you know, Activision, NVIDIA (NVDA), Nintendo, Take-Two (TTWO), so those are the major names that are really, really active in the video game space from either, you know, a production and distribution of video games or even from a production of hardware that is used in the video games.
And another important point about that fund specifically is that literally, unlike many of the other themes that we offer them, the exposure to the U.S. is just 30%. So, you see you have U.S. of 30% and you have Japan around 25%, 26%, China 17%, South Korea 10%. So, literally – and the reason why I'm talking about that, Jonathan, is not so much in the context of the fund specifics, but more in the context of the scope of this theme and it's something that again, I think for several years, many people have failed to realize how massive video games and e-sports ecosystem truly is.
JL: Sure. It really is a global phenomenon, if you look at it. So, it makes sense that the fund would be that diverse globally, not just in terms of the number of regions represented, but in terms of the fact that no single country is really above 30% there. So finally, with yields at historic lows, many investors are searching for alternate ways of generating interest income monthly or quarterly. You have a lot of funds in the dividend space. This has definitely been one of the big focuses for Global X and we'll probably have to revisit that in a separate conversation, but – so the biggest two of the bunch are your Global X SuperDividend ETF (NYSEARCA:SDIV) and the US focused companion, the Global X SuperDividend US ETF (NYSEARCA:DIV), these funds yield a ridiculous 9.7% and 8.3%, respectively. How are you pulling this off without taking on crazy levels of risk here?
LB: Well, I mean, I think you’re absolutely right, right. And when you look at where interest rates are today at historical lows, you know, the federal funds rate at zero; the 10-year treasury well below 1%. I mean, it's literally like investors are having real issues and having – and increasing the yield of their portfolios. I mean if you look outside of the U.S., you see the worse, right. So, you have some countries in Europe and Japan that have negative yields.
JL: Sure, yes. You really have to start looking to emerging market sovereign debt to start getting to what was considered a reasonable rate in places like the U.S. 15 or 20 years ago, you know, to get those 3% and 4% yield.
LB: Yes, absolutely. Because, Jonathan, I mean, and these are not just a numbers, right. So, there are people that are investors that literally depend on getting a certain yield from their portfolios to sustain their expenses, right, and there are multiple ways in which you can do that. And like you were saying before, and by the way, I’m very happy to have a separate conversation just on our [income solutions], we've been able to do successfully – to successfully offer income solutions to our clients in multiple ways, but one of the ways in which we've done it is with our SuperDividend family, right.
And basically, the strategy is pretty simple. It consists on, you know, isolating the highest decile of dividend paying stocks in a particular asset class or geography, right, like global stocks or U.S. or emerging market or REITs. And once that is important to note about how is the most effective use of some of these strategies is that these stocks, you know, tend to have a small cap value bias given their exceptionally high dividend yield. So, we typically see some of our clients using these strategies with some of our other, you know, large cap quality dividend strategies like, for example, our (QDIV) ETF, which is our S&P 500 Quality Dividend ETF.
You just combine that high yield with a little bit of a component of quality, but SDIV specifically what it does is very simple. You invest in 100 of the highest dividend yielding stocks around the world. It's equal weight and it pays a monthly dividend to investors. And if for whatever reason a stock announces a dividend cut, it is removed from the portfolio. Similarly, to answer your question about our Global X SuperDividend U.S. ETF, DIV, is very, very similar, but just with a focus on the U.S.
And the only chance that we introduce with a particular ETF is that we also screen the stocks for those with a beta of less than 0.85 to the broader U.S. markets with the idea of adding a low volatility flavor to it. But again, very similar to SDIV, DIV invests in 50 of the highest yielding stocks in the U.S., equally weighted on – based on monthly dividend to investors. If a stock announces a dividend cut, it is removed from the portfolio. And what we are seeing is our clients – you know they definitely like this high yield in the context of very low interest rates and monthly distributions are also very, very [welcomed] by the large majority of our client base.
JL: Sure. And it's removed from the portfolio when the index is reconstituted or very quickly?
LB: At the next rebalance.
JL: Got you.
LB: So the [index provider] because it's already built in this as part of the index methodology because as you will know that the ETF is sponsored on the index provider. Once the product has been launched, there is like a Chinese wall in between those two so [the index provider] is the one that is in charge of applying the methodology and the way these rules are [indiscernible] is at the next rebalance that company that has announced dividend cut will be automatically removed from the portfolio.
JL: Yes, sure. I mean, I guess theoretically, the index could, you know, have some rules written into it that removes any fund that cuts a dividend within a month or so, but what you're saying is there's a traditional – well, how often just out of curiosity, because I'm sure this was relevant with all the companies that have cut dividends over the last, you know, three to six months. How frequently is it reconstituted? Is that a quarterly or bi-annual?
LB: I think for those two specific [indiscernible] I think they are quarterly.
JL: Okay, interesting. That's pretty frequent, actually. I mean, you've got many funds that really just reconstitute once a year. So, you could be sitting on – you know, theoretically, if that were the case, somebody could cut a dividend after the reconstitution and then cut it two or three more times if that was an annual thing. So, I think that probably is something investors in these funds would be interested and that if you see that something is starting to cut its dividend, it's not going to be in the portfolio for another up to 11 or 12 months at that point.
Okay. So I guess without tipping your hand too much what other things exciting funds does Global X currently have in the pipeline, if you're able to discuss this? I know you're not always able to?
LB: Yes, I mean, I cannot give you the specifics, right, because for – there are some compliance limitations, but, you know, we're definitely very focused on, you know, continuing to bring solutions to the market. Specifically on the thematic front, we already have, like I said before, the largest thematic ETF platform in the world and we continue to see opportunities, right, new disruptive technologies, evolving demographic trends and changing consumer habits.
So, you will see hopefully over the coming weeks a couple of very interesting ideas coming to market in the thematic space, so I can’t really tell you much more than that, Jonathan, again for compliance reasons, but happy to have a separate conversation with you when those two products come to market. What I can definitely tell you is on the income front, obviously, like we were just discussing, the need for high income is not going anywhere anytime soon.
So, we've actually recently launched, I think it was like three or four weeks ago, our first ever actively managed product in the history of Global X and this was an emerging markets fixed income ETF, the ticker is EMBD. And the reason why we decided to go active for this particular exposure is because – two reasons, the first one is obviously emerging markets fixed income. These tend to be, you know, more illiquid and idiosyncratic markets, so we do think this active management approach makes a ton of sense. And then, second is because this product is actually [indiscernible] Mirae Asset and like we were discussing before, Mirae Asset is very well known around the world, but they definitely made a name for themselves in the context of emerging markets and they have presence in most of these emerging markets, right.
So they are in India; they are in Vietnam; they are in all of these markets with portfolio managers that are spending most of their time looking at this market. So, we did think it was the right approach of using that expertise and the experience to bring this product to market in the U.S. and it's doing fairly well. I mean, in just the first three or four weeks, I believe we've passed over $50 million in AUM, which is pretty good for a new product.
JL: Yeah, it is absolutely. Okay, so final question here and we won't hold you to this, of course, are you bullish or bearish on the prospects for V-shaped recovery? I mean, I guess as I wrote this question a week ago, it made more sense now that we've seen the re-closings in California and elsewhere. I think it's pretty clear we're not going to have a V-shaped recovery, but just curious for your outlook on the U.S. economy, the global economy specifically, and then, I think more interestingly, what are your favorite sector in thematic plays for right now with what's happening with COVID-19?
LB: Great question. And I mean, it’s really a million dollar question, right. So – and I think it's a really interesting time because we are dealing with something, you know, very unique that most of us have really not seen or dealt with before, at least not recently. We haven't really dealt with something like COVID-19, the heavy impact that COVID-19 had in the context of, you know, literally the economy shutting down and everyone literally being in lockdown. So, it's definitely an interesting time, but the way I look at it, so we have – on one side, you have, you know, COVID-19 not containing in the U.S. and in many other countries around the world.
Consumer spending remains below pre-COIVD levels, you know, very high unemployment. There's still a lot of question marks around what's going on with the re-opening of the economy, right. Is there going to be like a second wave, third wave [indiscernible] businesses just starting to go back to work like as normal, right? So there are many question marks. On the other side, you have exceptional central bank actions from the Fed and all other central banks around the world that ultimately, you know, is reducing the cost of capital for companies is stimulating growth and it's avoiding, you know, what we've seen in other crisis, which is a large scale bankruptcy.
So, we do expect that volatility will be the norm through year-end because again, COVID-19 big question mark, elections coming up in November in the U.S., and the economy, again, going through like a high degree of uncertainty on many different levels. In terms of themes that we think are best positioned through year-end, we continue to believe that cloud computing and e-commerce are going to remain essential, you know, not just in the context of the stay-at-home economy, but also in the context of post-COVID-19 war, right. And I think the market is acknowledging the tremendous amount of potential that you see in those two themes, right. So, some of our fastest growing ETFs this year have been our e-commerce ETF, which is – I believe it's up almost 30% year-to-date. And then cloud computing is quickly approaching a $1 billion in AUM and that ETF is specifically I think it's up, you know, north of 35%. So, I do think any company that is involved in the detail delivery of goods and services is a clear winner from this otherwise very unfortunate situation.
JL: Sure. And I guess it all comes back to Amazon somehow, because I'm guessing that’s one company that sits at the very top of both of those ETFs?
LB: Yes, absolutely. I mean, obviously, Amazon has been doing very well. I mean, their business model continues to win, right.
JL: Yes.
LB: So, the market is acknowledging that there are some companies that continue to win, particularly in the context of a COVID-19 environment.
JL: Absolutely. Anyway, Luis, I want to thank you for being so generous with your time today. This has been incredibly fascinating and illuminating, lots for listeners to go back and research further. Where's the best place for listeners to go and research everything we've been discussing here today online?
LB: I think the best place to go is our website. So, that's www.globalxetfs.com, and then you can find information about our funds, our research, our ETF model portfolios. I think that's definitely the best place to go.
JL: Sure. And you have some great pieces of research on there also. So, you have a great piece in the cannabis space, particularly about how the cannabis industry is coping in 2020 and you have many other great pieces of thematic research there also, so certainly something worth checking out also. And then what about social media?
LB: I think we are very active in pretty much all platforms, LinkedIn, Facebook and everything else, but particularly active in Twitter. So, you can follow the company at GlobalXETFs and you can also follow me directly at LuisBerruga.
JL: Excellent. I am following you as we speak. I already was following Global X.
LB: I will follow you back.
JL: Thanks. And we will tweet out this podcast, of course, and publish an accompanying article on Seeking Alpha and you can always do further research on these particular funds on Seeking Alpha Quote Pages also. Anyway, I want to thank you again, Luis. You definitely have to rejoin the show. There are so many parts of your lineup, the income generating parts of it, the Chinese thematic funds, the scientific beta funds and many single-country ETFs that I find very interesting. Also that you have in your lineup, so you definitely will have to rejoin the podcast at some point.
LB: Absolutely. It will be my pleasure to join. I really enjoy the conversation with you. And to be honest, we have a lot of new ideas coming to market. So, I think we'll definitely be ready to have another conversation hopefully in just a few months.
JL: Definitely. That sounds great.
For disclosures, Luis Berruga owns more than 15 Global X ETFs in his personal account. Jonathan Liss is long EBIZ.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
