New ETF Jumps Into Pro Sports

August 07, 2017

Nick FullertonSportsETFs is an issuer of equity ETFs that have exposure to the sports industry. The company's first ETF, the ProSports Sponsors ETF (FANZ), holds companies that are official partners of the NFL, NBA, MLB and /or NHL. Nick Fullerton, the firm's co-founder and president, has run a registered investment advisor for a number of years, and is passionate about sports and investing. ETF.com caught up with him to discuss this new niche in the ETF industry.

ETF.com: Let's start by talking about your company, SportsETFs, and the ETF you just launched, the ProSports Sponsors (FANZ). What’s the motivation behind FANZ, and are all your products going to be based on sports?

Nick Fullerton: My partner Jim Kozimor and I, our kids go to school together, and we were having coffee one day, and we were trying to figure out who's making money on pro sports.

He’d been showing me some stats about how much the leagues' current revenues are, what their growth rate's been, and what they're projecting in the future. The NFL's saying they want to have $25 billion in revenue by 2025, up from $12.5 million this year. So they want to double revenues.

We took a step back and said, who's making money from these sports leagues? And it was: owners, the leagues, and some of the players.

Half the U.S. really enjoys watching sports on the weekends and every night, but they have no way to participate in that through investing. Yes, they can buy Nike stock, yes, they can buy Under Armor, but when it comes to watching these games and teams and players that they follow with a passion, there was no way for them to invest in that.

We decided to look at the broader sports industry and see who else was making money from these. We went through a whole big process of sponsors: Do we look at eyeballs, do we look at game attendance? How are we going to capture this growth?

We felt all these companies that get into a financial relationship with the leagues were poised to benefit from that growth they're shooting for.

And yes, potential future products would also have a sports theme.

 

ETF.com: How much can you keep slicing that, though? It’s obviously advertisers and primarily consumer companies when it comes to FANZ, right?

Fullerton: The FANZ index is definitely tilted toward consumer staples and consumer discretionary. It makes up a little over half the product. But we don't feel it's a retail ETF. It also has financials and energy, as well as health care.

But in terms of slicing and dicing the sports and advertisers world, if you look at some of the other sports leagues out there, their partner base is completely different than what's in what we call the core four U.S. leagues.

There are potential international-type products. If you look at stadiums, for example, it's not necessarily consumer brands. And there's a huge push right now in e-sports, for example. Those partners typically aren't your everyday consumer product.

We don't think there's an infinite number of products we can go after, but we think there are other products that would benefit the investing community.

ETF.com: And how do you hope to distribute FANZ? It seems geared toward the retail investor as opposed to an institutional investor.

Fullerton: We're starting to do a fair amount of social media marketing to a retail-type investor. But we feel that once the RIA community and the wire house community look at the metrics and look at the index and see how it's built and constructed, it’ll warrant a place in more of an institutional portfolio versus a retail investor.

But initially, I agree, we want to target the more do-it-yourself investor.

ETF.com: You're basically creating these indexes? And that's the core of the business?

Fullerton: Correct.

 

ETF.com: And who's helping you build the indexes, or are you doing it yourself?

Fullerton: We first worked with a group called the Global Index Group to develop the initial index. And now we're working with a gentleman named Paul Starkey, who’s on our advisory board.

He was one of the creators of the Dividend Achievers Index. So he's doing a lot of the legwork on maintaining the index and helping us do rebalances and reconstitution of this first index.

ETF.com: And it’s equal-weighted?

Fullerton: Correct, equal-weighted.

ETF.com: And how many holdings?

Fullerton: There are currently 66 holdings in the index, from a universe of 105 potential companies.

The reason it's not all 105 companies is because a number of the league partners are private, a number of them don't meet our minimum trading requirements or minimum volume, or are not listed on U.S. or Canadian exchanges or have ADRs [American depositary receipts].

ETF.com: How often do you rebalance or change constituents?

Fullerton: We rebalance four times a year, and coincide those rebalances with the start of each league's season.

So we’re going to be doing a rebalance this month, August, for the NFL. There will be a rebalance in September for the NHL and NBA seasons. And then one in December for the broadcast partners, and then March for Major League Baseball.

One of the reasons we equal-weighted versus cap-weighted this is that the financial relationships between the leagues and our partners are not disclosed.

Typically, the NFL might say, “We've entered into a five-year agreement with Marriott to be the official hotel,” but they don't disclose the economics of those relationships.

 

The only disclosure is for the broadcast partners; they say, “Hey, we paid pro football $1 billion for rights to Sunday games for the next six years.”

We felt that no one partner was more valuable to the league than another partner. And for that reason, we equal-weighted.

ETF.com: What's the average market cap now for the underlying companies?

Fullerton: I don't have that off the top of my head, but it's definitely large-cap tilt, domestic and international. The index makeup is about 85% U.S. domestic, and then about 15% international developed companies. Some of those international companies are big names like SAP, Honda, Anheuser-Busch, Barclays, BP.

ETF.com: Apparently, Beyonce is interested in buying the Houston Rockets; any thoughts on that?

Fullerton: From some of the chief marketing officers we spoke to from some of the constituents, they felt there's no better way for them to reach a targeted loyal audience. And Beyonce wants to sell records. If she can have all the Rockets promoting her and having her name out there to all these fans, it seems like a good thing.

ETF.com: Anything I didn't touch on?

Fullerton: One of the key points we like to make is, as you know, there are so many ETF products coming out that are tough to understand. Smart-beta factor this, or momentum-based factor that.

We really feel this is an intuitive product that's easy to understand, from both an advisor community as well as the end investor community. The underlying companies within the index are typically large, strong diversified companies. You don't have to go to an economics class at Berkeley to understand what's going on in this thing. We feel that'll appeal to a lot of people.

 

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