Tema's ROYA Aims to Be Easy Way to Invest in Royalties

Tema's ROYA Aims to Be Easy Way to Invest in Royalties

Royalties investing is going mainstream as artists are getting into the business along with energy producers and mining companies.

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Reviewed by: etf.com Staff
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Edited by: Mark Nacinovich

Royalty companies that niche financers found in the commodities sector are going mainstream. 

Most royalty companies invest in miners or energy producers for a cut of the profits. In recent years, the royalty concept has moved to entertainment, as musicians started selling rights to their song catalogs. That has opened a new way for artists to make money and investors to get paid when those songs get played. 

Retail investors are starting to get into this business, too. For example, in October the investing platform Public announced investors could purchase a slice of the rights to the score of the “Shrek” film franchise.  

It’s part of the growing alternative assets field, and now investors interested in owning royalties with the ease of an exchange-traded fund can look to the Tema Global Royalties ETF (ROYA). The actively managed fund, which holds 26 stocks, launched in August with a 0.75% annual expense ratio. 

In the commodities sector, royalty companies provide capital to asset owners and receive a cut of the mine or energy-producer’s cash-flow streams.

These investments give royalty companies exposure to the asset while avoiding the risks associated with capital-intense industries, such as operational expenses and capital costs. These payment streams increase as a mine expands production and are sheltered from inflation because cash flow increases with rising prices. 

Royalty Financing 

Chris Semenuk, investment partner at Tema, says royalties as a financing form are likely to become more popular as asset owners look for liquidity that comes with fewer restrictions than a bank loan. Royalty financing lets asset owners use the money as they see fit. In an era of higher interest rates, royalty financing is likely to increase, Semenuk says. In the mining sector alone, royalty financing has grown to $15 billion from $2 billion in 2000, he adds. 

ROYA balances holdings between traditional commodity-focused royalty companies such as Texas Pacific Land Corp., Wheaton Precious Metals and Franco Nevada, to provide income.

Newer royalty companies provide growth, including names such as Warner Music Group, Interdigital, which holds copyright licenses on mobile chip technology, and Royalty Pharma, which invests in pharmaceutical royalties. 

ROYA’s Criteria  

To be included, companies need at least $100 million in market cap and an average daily trading volume of 500,000 shares. About 45% of holdings are U.S.-based and 40% Canadian names. In portfolio construction, the fund could be a lower-risk way to offer commodities exposure, he says.  

One of the risks to royalty companies is if mines close or production doesn’t come online. Closed mines may reopen under new management who will resume royalty payments, but that can take years. 

Some projects don’t get off the ground, either. That’s a higher risk with some of the recent start up royalty firms, he says, because some launched when interest rates were low and lent money to asset owners who were forecasting future production, rather than owning already-producing assets.  

One example of a newer music royalty firms that’s struggling is Hipgnosis Song Fund. It acquired rights from musicians such as Blondie and Neil Young, but its share price fall by 50% in a year. It is not part of ROYA. 

Bottoms-Up Research 

Knowing which royalty firms have stronger balance sheets is critical when adding them to the portfolio, and doing bottoms-up research is why Tema took an active approach when creating ROYA rather than create an index-based fund. 

Semenuk believes royalty financing as a form of investment is in its infancy as it moves out of the commodities sector and into other industries. 

“We think the runway for royalties is very long term in nature, especially in this current environment of high interest rates,” he says. 

Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.