No Profit? Not a Problem With Proposed Tech ETF

An exchange-traded fund investing in companies not making money may appear counterintuitive.  

With Roundhill Investments’ latest ETF, it’s in fact the first qualification for inclusion. 

New York-based Roundhill, known for its marijuana, meme and metaverse ETFs, is again going against convention with its Roundhill Non-Profitable Tech ETF. The fund appears to take a page from the venture capital playbook by betting on companies that haven’t earned a dime in the past year, with the goal of finding a future profit generator. 

And to provide an opportunity for those who want to bet against profitless firms, Roundhill is also proposing the Roundhill Short Non-Profitable Tech ETF. 

Roundhill’s proposal comes while investors are largely skittish about taking on risk. The banking crisis that took down Silicon Valley Bank, rising interest rates, stubborn inflation and fears of recession have pushed investors into safe havens. 

In March alone, U.S. equity ETFs had outflows of $16.5 billion, a fifth-straight month of outflows, Morningstar reported this week. At the same time, money went into safer bond investments, and money market funds brought in $363 billion, Morningstar said. 

Still, falling profits and prices may be creating the right conditions to take chances on such a fund, one expert suggested.

"It was Sir John Templeton who said that you want to buy when there’s blood in the streets," Kevin Simpson, Chief Investment Officer of Capital Wealth Planning in Naples, Florida, wrote in an email. "I imagine that that may be the case in the non-profitable tech space."

The Roundhill fund will track what it calls in its filing the Non-Profitable Tech Index. While the index owner wasn’t named, Goldman Sachs owns an index called the Non-Profitable Tech Basket. That index has gained 14% this year, following last year’s punishing 62% drop, according to Bloomberg. 

Roundhill says the fund will include so-called “innovative companies,” and exclude those that reported profit in the past year or that are expected to do so in the coming year. Also excluded will be companies with borrowing costs greater than 1% a year. 

The issuer, which has eight U.S. ETFs with $612.9 million in assets, has taken risks with investments that more mainstream firms have shied away from, much in the same way venture capital or private equity firms seek to get into early on promising or trendy innovations. 

Its biggest fund, the $443.8 million Roundhill Ball Metaverse ETF (METV), has surged 27% so far this year, yet trades well below its January 2022 price. The Roundhill Sports Betting & iGaming ETF (BETZ) has gained 14% while also being in negative territory over the past year. The Roundhill Cannabis ETF (WEED) has lost 29% so far this year. 

Roundhill didn’t immediately return a call seeking comment. 

Contact Ron Day at [email protected] or follow him on Twitter at @RonDayETF