Introducing $DEEP - The Deep Value ETF
I spend a lot of time thinking about Roundhill - I suppose that’s to be expected. As a result, I have quite a few thoughts about our business. For the last two plus years, I’ve mostly turned to Will with these thoughts. During a recent conversation on the subject, Will suggested I put pen to paper and put together a blog post of sorts talking about the business - past, present, and future.
Whether he said this because he thought it would help move the business forward or because he wanted a little break from my ramblings is unclear…either way, I thought it was a good idea. We’re a pretty “public” operation at Roundhill. That’s not by accident, either - it’s very much a part of our core strategy. And while we haven’t purposefully “guarded” details around the underlying operations, they really haven’t been front and center.
Why? I honestly don’t know. For the business we’re building, we need to have support from the public. The more I thought about it, the more obvious the next step seemed. Moving forward, I want to have a conversation with our audience that’s wide open. Consider this post the start of a new communication strategy that you’re all going to be a part of.
Will and I started Roundhill in 2018. The idea for the business didn’t come together overnight - quite the opposite, actually. Frankly, I would argue it continues to evolve to this day, and I’d be concerned if that evolution ever stopped.
Related: Introducing Roundhill
To make a long-story short, our theory was that there existed a group of self-directed investors here in the U.S. that was underserved by the investment management industry. They didn’t want to be told to “buy broad-market indexes” or that they should “really put their money with a professional”. They wanted to do their own homework, build a framework for investing consistent with their views, and execute it on their own.
As an aside, a big part of coming to this realization is tied to Bitcoin and the crypto-explosion in late 2017. While this phenomenon definitely led to new interest in investing, it also led to a considerably more public conversation about investing amongst friends, family, co-workers, etc. This conversation was essentially completely organic, meaning, not steered by any real “establishment players” and, in my opinion, was considerably more interesting as a result.
We decided to start an asset manager and make products for these investors. We believed that if we combined compelling products with a differentiated marketing strategy, there was white space for us.
When the time came to get started, we settled pretty quickly on exchange-traded funds (ETFs) as the right wrapper for our products. We wanted to ensure whatever we created was available to the widest possible audience (check) and that transacting in it felt most like trading stocks (also check). It also helped that Will knew a thing or two about launching ETFs, so there’s that.
Related: What is an ETF?
We also knew that the ETF business was a pretty good business if you can get assets in the door (a big if, to be fair). The up-front costs for exemptive relief (may it rest in peace) had come down materially over the years and the minimums associated with launching an ETF were manageable. On the other side of the equation, they kick off a nice operating margin at scale and require roughly the same company-level overhead at $1 million in AUM as they do at $1 billion in AUM.
The next part was a bit harder. We needed to make ETFs that were interesting to our target audience. We quickly checked “broad-market” ETFs off the list based on what we knew about our target audience. Fixed-income was also out, as were ETFs utilizing derivatives and commodities because they looked and felt a bit too much like “establishment” products. Thematic ETFs sort of floated to the surface.
Why, you ask? Well, for one, they lent themselves best to an “expanded” Peter Lynch style of investing (“know what you own, and know why you own it”). The people we wanted to build for had historically invested in things they understood and believed in - whether individual stocks or cryptos. Thematic ETFs are also more conducive to story-telling and thus a good fit for our differentiated marketing strategy.
Having landed on Thematic ETFs, we needed a theme. We needed something that had a compelling investment case, didn’t receive sufficient coverage from the “establishment”, and appealed to our target audience. More importantly, we needed a theme that Will and I cared about because, well, otherwise what was the point?
Enter video games. Will and I have known each other for a long time, and like many our age, we played a lot of video games over the years. We’d both been following the industry passively over the years (as consumers, primarily) and ultimately realized that a material shift was underway within gaming - a few of them, actually. I won’t go crazy on the opportunity here, check out the below piece for more.
Related: Esports 101
Theme in hand, we got the ball rolling on two separate fronts - raising money and preparing to launch our first ETF - both of which taught me an enormous amount. Each subject would frankly need its own piece, so if you’ve made it this far and want to hear more about either, let me know!
Alright, so - did it work?
Speaking transparently, no - at least not right away. I believe there are a few key reasons for this. We definitely made some mistakes out of the gate, mistakes that in hindsight I kind of can’t believe but that made perfect sense at the time.
Before we get into what we did and whether it worked - a bit on how we ultimately measure the success of our business. It’s pretty simple… If more people buy our ETFs than sell our ETFs, assets held in our ETFs (AUM) will go up over time. Roundhill, as the “advisor” to the ETFs, receives a fixed management fee on all assets invested in our ETFs.
So - while we measure and monitor a lot more than just the assets flowing into our products, asset growth is really what matters to us, from a financial standpoint. Using very round numbers, an ETF charging 50 basis points (0.50%) “breaks-even” between $40-50 million in AUM. This does not include “advisor” expenses, or operational expenses.
This brings me to the first lesson, which is that getting $40-50 million into an ETF as a brand-new company is not easy. To give you some context - our first fund dropped as low as $9.0 million in March 2020 (as markets collapsed) - 9 months after it launched.
The second lesson has two parts, but they are really tied to the same concept. In summary, if you’re trying to be “disruptive” or “take a different approach” - actually do it. More specifically, don’t half do “it” and half do it the old fashioned way.
Part one was trying to execute a traditional “sales” process for our products. Given my background in sales, I thought I could take a stab at this. So, I rolled up the sleeves and hit the phones, calling and writing to institutional investors that I believed might be interested. We “invested” in a number of resources to optimize the time I spent on this, including heavy-duty customer relationship management (CRM) software and access to various prospect databases.
It didn’t work. First of all, I’m not a great cold-caller - that’s on me. But honestly, I don’t know that it could have worked. The channel I was swimming in was full of experienced salespeople selling their products. They already had relationships, and they had more than one product to sell. They were also selling “proven” products from a “proven” advisor - or, said differently, products where if things didn't go well, the decision maker wouldn’t be blamed.
It also would have been unlikely to work for another, slightly more nefarious reason. Most of the large “platforms” have a due diligence committee that has the ability to “turn on” funds from a given advisor. While an argument could be made that these committees are in place to prevent advisors from buying “bad funds”, the process for approval is, generally speaking, shrouded in mystery and appears to be a *lot* easier if you have other relationships with the platform (e.g., they make money off you elsewhere). I won’t elaborate on this here but am happy to chat more about how the current system doesn’t benefit anyone other than the establishment. (For more on the current distribution climate, check out Jillian DelSignore’s work for ETF.com).
Part two is a little different in that while we’d argue it “wasn’t working”, it didn’t completely not work. We explicitly modeled “marketing spend” in our financials, figuring that it would be a compelling way to build our audience and sell our funds. Over the first half-year of operations, we did just that - spending on advertising campaigns on various channels, sponsorships, and other paid channels we’d seen used by other ETF advisors.
Some of this worked, some if it didn’t - at least, to the best of our knowledge. We ultimately stopped using “paid” channels as a key part of our strategy for three reasons. First, we didn’t have the resources to compete with bigger shops. Second, we couldn’t measure the effectiveness of our campaigns given consumers don’t buy funds directly from us (attribution in ETFs is notoriously hard). Third, even if we had the resources to continuously carry out paid campaigns and had better attribution, we didn’t think that the business model was all that compelling.
So to summarize the second lesson into more general terms (that I’d venture to say might be useful in other industries): if you are doing things different, focus on where you are differentiating and don’t waste resources putting forward a lazy effort doing things “the old way”.
Learnings in-hand, we decided to double down on our efforts to do things differently and launch a second fund while making a few small changes to our approach.
First and foremost, we decided to eschew the paid marketing channels and distribution model that we had half-tried and fully-failed with. If we were going to win, we were going to win by (1) creating and distributing compelling content to our audience and (2) leveraging that content into earned media and social media. That, we decided, was the model for creating “viral ETFs”.
Second, we rethought our “theme selection” process in light of the evolved distribution model. How, you ask? Well, whether or not a “professional investor” would want to present our product to a client became a bit less relevant… said differently, it didn’t need to have a suit and tie appeal. We also increased the value ascribed to “potential media coverage”, acknowledging that for something to have an opportunity for virality, it must be in the news often. Finally, in light of being beaten to market by a matter of months on our first theme and experiencing headwinds associated with the timing, we wanted to make sure we were truly first to market.
Enter Sports Betting. Looking back, the decision seems obvious. It wasn’t that obvious at the time, so much so that I admit to have favored a different theme that was in the running but ultimately decided to trust Will given how strongly he felt about the theme.
Related: Sports Betting 101
Why didn’t I love it? For one, sports were not on when we got the ball rolling. As a part of the global response to COVID-19, professional sports had been shut, and whether or not they’d be turned back on anytime soon was really anyone’s guess.
I also had hesitations around the taboo nature of Sports Betting. Sure, most everyone I knew didn’t much care whether or not others bet on sports. But it had been illegal at the federal level merely two years ago! There was (and still is) uncertainty around the timeline for various states, and even though we’d determined that institutional channels weren’t necessarily where we’d win, I couldn’t imagine a risk-averse financial advisor going out of their way to get their clients interested.
Good thing I listened to Will…
This all brings us to today - where we are, as a company, at the time of this writing. As of 12/2/20, we have roughly $240 million in assets under management across three funds (two that we advise, one that we sub-advise).
This second fund helped “prove” our thesis that we could create a viral ETF. The coverage we received and the assets we saw flow into both the old and new fund were material enough that we decided we were onto something.
(I won’t discuss specific ETFs in this piece as the purpose of this piece is not to market our funds.)
With evidence in hand that it was possible to launch a “viral ETF”, we set out to better understand how exactly we did it so that we could do it again. In my mind, there are really three channels we have to set the stage for virality. They are (1) Roundhill owned channels, (2) traditional media, and (3) social media. To effectively engage the public through these channels, we believe there are three things you must do.
We’re not going to compete on price. We’re also not going to compete by spending a ton of money on marketing and outreach. We do believe that we can differentiate by building a community.
A lot - if not most - of what we do is really centered around this. Some of it may sound silly - like making sure to reply to every personalized inbound email or social communication we receive - but we believe it's important to be reachable. We often send Roundhill branded swag as a token of appreciation to individuals that help amplify our voice.
We truly want to engage with our audience, and have some grand plans to further our goal of building a community that I’ll dive into later… For right now, the most important and most consistent way we try to build community is with content.
You have to create content. We are by no means the only example of a company differentiating by creating and distributing content to the masses. I do, however, believe that we’re unique within financial services in the type of content we create and how we distribute it. To understand how we think about content, it helps to understand who we’re trying to reach and what is currently available to them.
The self-directed audience we care most about doesn’t fit nicely into a box. They don’t all use the same platform, have the same investment goals, or use the same tools to reach them. We also believe that the majority of them either (a) aren’t as interested in more traditional financial analysis like fundamental or technical analysis or (b) don’t need to get that “stuff” from us.
We’re still learning what types of content are most effective at engaging our audience and building a community, and we know not everyone is going to enjoy the same formats - that’s ok. We’re going to keep rolling new ones out as we learn more about what’s working and what’s missing… and welcome any and all feedback on where we should have a voice!
Finally, we’ve found it's of paramount importance that we trust our audience. The channels we mostly use to build our brand and engage our audience aren’t channels that are that well-suited to selling investment products.
But that’s ok, because we believe investment products - in our case, ETFs - are bought, not sold. If someone is engaging with our content, they’re likely interested in at least one of our themes. In the event that they develop an opinion while reading Roundhill content, we are confident they are capable of rolling up their sleeves and doing their own research on how best to express this opinion in the markets.
We believe our products can be useful in expressing an opinion… Do your homework, understand your options, and make your own decisions.
We believe the audience we’re building for wants more. More than just thematic ETFs, or even ETFs generally. We believe that the investors we’re engaging want a different investing experience, something that looks a little bit more like the other media they interact with. We also believe that, for many, investing is a very personal thing. While outside support can be useful, these investors want to play a more active role in determining how their money is investing (and what their money is supporting).
The best way to do this is to make investing more social, and we’re working on something that does just that… more on that under “Where We’re Going”.
As we embark on Roundhill’s next chapter, Will and I knew we couldn’t do it alone. To that end, we began the process of expanding our team this summer, culminating in the hire of two exceptional individuals who believe as strongly in our mission as we do. Matias Dorta and Mario Stefanidis joined the team on August 31st and September 14th, respectively… If you aren’t following them yet, please do.
Speaking of the team, and in keeping with our broader MO, everything we’ve described above about building a community, leading with content, and trusting our audience doesn’t just apply to the company brand. We want our team to build their own audience, too.
The financial services industry has historically gone to heroic lengths to discourage employees from having any form of public profile relating to investments. Kind of a mistake, in my opinion, but I can see why they do this. We believe there’s a real opportunity here, so we’re doing the opposite (and checking all the requisite boxes along the way to comply with the many regulations).
Ok - so congrats to you, Roundhill… it looks like you're not completely clueless… what’s next? We’re working on a few things and wanted to use this time and space to fill everyone in.
Everything we’re doing is really focused around being the investment firm for our audience, the “next generation of investors”. As we continue to build, we’ll learn more about this group, expand the audience we’re cultivating and adjust our strategy appropriately... What started with a single fund focused on the opportunity within esports and gaming for the gaming public will continue to morph over time.
Proof of concept in hand, we’re going back to the drawing board for additional Roundhill branded thematic ETFs. The wheels are already in motion on two, with a few more coming up behind. We can’t, per se, “leak” the themes here for regulatory reasons, but as soon as we’re able to discuss them, you’ll hear from us.
Beyond these two themes, we plan to continue building out our suite of products into the future. Sure, some themes may get “crowded” over time, but we believe others will replace them. As an example, sports betting was illegal at the federal level until 2018…something tells me that theme wouldn’t have worked then as it has now. Identifying compelling themes is part of our company DNA, and is something we will continue to strive to do.
We also believe - perhaps naively, I'll admit - that it’s possible to build brand loyalty within the ETF space. Those following the space closely already know this, but for those who aren’t - there isn’t really any protectable intellectual property in ETFs. As a result, successful funds are often subsequently followed (a nice way of saying copied) by competitors, often for a little bit cheaper than the original.
We know that successful funds may see competition sooner rather than later, and that’s ok. We hope that the totality of our offering is enough to keep punching above our weight.
In addition to launching additional thematic products, we’re working on new types of ETFs altogether. Generally speaking, when we contemplate “innovation” in the ETF space, we start by thinking, once again, about the audience we’re building for. What types of investments do they want? What do they not have access to that ETFs might be able to solve? How can we create funds that scratch their collective itch?
Without going too far into the specifics here, we’re working on two primary “types” of products that we believe will be really interesting to our audience. In both cases, we would be offering the average investor access via the ETF wrapper to strategies that are otherwise unavailable to them. Both types, unfortunately, bring up a number of regulatory questions that we’re actively working through.
(If you’re interested in helping us crack the code on these two product lines and have some expertise that might be relevant, we’d love to chat!)
Based on our web traffic and social following, we know that large parts of our audience are outside the US. Unfortunately, the global regulatory landscape for investment products isn’t built for cross-border portability. So what are we going to do?
Over time, we hope to be in a position to invest in building the required infrastructure to make our products available in other markets. We’re confident that the demand is there, and that we’ll ultimately be able to do so…it’s just going to take some time to do it right (and compliantly). If and when we do begin adding new markets, we’ll be sure to let everyone know.
(On a related note: if you are a non-US investor and ARE able to buy Roundhill funds, we’d love to hear from you.)
We’re building a social investing app called Stonks (yes, you read that right). So what is Stonks? We like to think of it as a social layer on top of one’s investment activity. I’ll be writing a lot more on the app once it’s live, including shameless requests for feedback as we try to build something that does the most for the most people.
Basically, it works like this. A user signs up and then links at least one brokerage account to the app via the Plaid API. If the user has accounts at multiple brokerages (or multiple accounts at one brokerage), they can choose to link them all.
Once in, they can see how they stack up to other users (portfolio weights, returns, and trades), communicate with other users, and see what the community at large is up to. The app is currently operational in a closed beta, and we plan to release it into the world in largely the form it's in. As I stated earlier, we want to build something people use, and to do so we need to better understand how early users make the most of the app.
If this sounds interesting to you, join the waitlist here.
So what was the point of this exercise? The way I see it, our business works best when we’re engaging with the public. This has and always will be true for our products, and should by extension be true for the business more broadly.
Moving forward, we’re going to make a conscious effort to “build in public”. There will be things we can’t discuss for various reasons (mostly regulatory, some may be business decisions) and times when we have to wait a little longer than we’d like to let the people know what we’re doing, but when and where possible, we’ll open up and see where it goes.
If you made it this far - thanks for reading, thanks for supporting Roundhill and don’t be afraid to hit us up!