ETF Expert Corner

PureFunds CEO Andrew Chanin Spotlights Video Game ETF, Drone ETF

July 12th, 2016 by ETF Store Staff

Andrew Chanin, CEO of PureFunds, spotlights their Video Game Tech ETF (GAMR) and offers some thoughts on the recent Pokemon craze sweeping the country.  Andrew also highlights the PureFunds Drone Economy Strategy ETF (IFLY).



Transcript

You can listen to our interview with Andrew Chanin by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: We're actually spotlighting two ETFs this week, the PureFunds Video Game Tech ETF. The ticker symbol on that is G-A-M-R, GAMR. The PureFunds Drone Economy Strategy ETF, ticker symbol I-F-L-Y, IFLY. Joining us via phone from New York to discuss these two ETFs is the CEO of PureFunds, Andrew Chanin. Andrew, as always, a pleasure to have you on the program.

Andrew Chanin: Happy to be back.

Nate Geraci: Andrew, we're going to start with the Video Game Tech ETF. Before we get into the details of that, I have to ask you what in the world is Pokémon Go? I’ve got to tell you, Conor and I are no longer the young pups we used to be. I know this is a craze sweeping the country, propelling Nintendo stock. What is Pokémon?

Andrew Chanin: Pokémon is fairly old, in the world of gaming franchise. It was a popular cartoon as well. It was very popular on Game Boy and a franchise that hasn't really been updated in several years. Nintendo partnered with another private company, Niantic and licensed Pokémon to them. It's actually, so far, as you mentioned, it's been a smashing success and really the first breakthrough that we've seen on the augmented reality front. Nintendo doing a couple really neat new things for what their business model was. They're actually creating, or working with companies to help get Nintendo brands out there more by using software game developers that can help build programs that are actually smart phone capable as opposed to playing Nintendo games on a Nintendo console. They're getting increased distribution to people that have smart phones. They're overlaying augmented reality so people have a completely new experience. Pokémon seems like it was just this perfect ripe franchise for them to use to re-vamp and use some of this modern technology.

Nate Geraci: All right. Let's talk about the PureFunds Video Game Tech ETF. This obviously provides exposure to the video game industry. It's the first ETF of its kind. What exactly does this ETF hold? How are these holdings determined? What's the ultimate goal of this ETF?

Andrew Chanin: Going with the PureFund strategy of creating these products that focus on these specific industries, video game technology is one that's misunderstood from the mainstream. It had its start strictly on the entertainment side, something that you'd go to either an arcade, or you'd play at a console at home. Now we're really seeing this next phase of evolution where essentially the fund holds video game companies, software companies. It includes companies that are building these consoles, distribution and retail companies, peripheral device application companies as well. You're getting over 30 companies from around the world of different sizes that are specializing in different areas within video game technology. I think it's really important to understand that video game technology is much broader than just video games and much broader now than just entertainment. It's taking some of these newer technologies, augmented reality, which we talked about with Pokémon Go. Virtual reality is another big buzz word associated with the industry. These have significant ability, as these technologies develop, to move beyond entertainment into the classroom; healthcare, fitness. It's the emergence and growth of this technology. As you mentioned, this is the first fund to really focus on this industry.

Nate Geraci: Also Andrew, I know there are now professional competitions for video games where people will actually buy tickets to watch video gamers compete like you or I might watch a football, or baseball game. I know a lot of the new video games coming out have Hollywood movie type budgets and a lot of big marketing behind them. Tell us what the space currently looks like on the traditional side and perhaps some of the growth opportunities moving forward.

Andrew Chanin: Not only is it that, we're seeing universities offering scholarships to both game developers and game players. It wouldn't be surprising if we see competitive gaming become another college collegiate sport. That's just one thing to point to. It's been an industry, like I said, that most people misunderstand. The video game technology industry, actually last year around the world, more money was spent on that than cyber security. We also obviously have the Hack Cyber Security Fund. About $75 billion were spent globally on cyber security with over $90 billion spent on video game technology. Talking about these new trends that we're seeing, it's digital distribution, which are helping the margins for software companies as opposed to having to hold it at the store and make a physical cartridge, you can actually just send the download instructions online. 4K and ultra HDTVs are making the experiences better, and clearer, and more engaging. Augmented reality, virtual reality these are things that are still in their infancy, but have the ability to transcend, like we said, entertainment and into education, healthcare, simulation training. It's something where we're seeing this technology that started off just for fun. We're seeing all these neat applications that it can be applied to.

Conor Kelly: Andrew, this is Conor Kelly. Staying on this AR discussion, this Pokémon Go app is such a big deal, because this is one of the first big launches of augmented reality. For our listeners, what we're talking about is augmented reality is a combination of some virtual reality combined with your real world. People are using their phone, walking around seeing the world around them with Pokémon being engaged. It's not a total virtual reality world where everything is digital. It's the combination of your real world and this digital game.

Andrew Chanin: Exactly. Virtual reality, think of it transcending you to a different place. Augmented reality is taking reality, what's around you, and having some type of digital overlay on it. What this game is is you're seeing people are able to go around on this map which is actually the world and go to these different monuments and sights. You might see a Pokémon jumping around on the bench in Central Park and then you move your phone away and it's just a bench. This is the first time that we've really seen it catch on with the mainstream. I think it just goes to show the ability that some of these gaming companies will have to not only revamp older popular franchises, but also create brand new games and applications using this technology.

Conor Kelly: I think your amount, the figures you discuss spent on gaming last year would surprise a lot of older investors. When you're into your late 30s and your 40s and beyond, you largely have missed this gaming phenomenon. The size of this industry, I think, would shock a lot of older investors.

Andrew Chanin: It probably would. Also, the demographics of what a gamer is are also transforming. Gamers are now older. The gender split is almost even. We're seeing more people playing it. More people have access to it, because of mobile gaming. There's fewer barriers too. Pretty much anyone with a smart phone has the ability to now become a gamer. The fund also holds companies that specialize in mobile gaming and those platforms too. We're seeing because older people as well, have cell phones and smart phones, they're playing these games on the subway, or out in the open too. It's really been able to reach more people. You don't necessarily need the same expense, purchasing a console and all if you use controllers, peripheral things, in all these games. You could do it relatively inexpensively as well, and get great distribution on these new platforms like mobile gaming.

Nate Geraci: All right, Andrew. Before we move on here, because I do want to touch on the drone ETF, where do you see the PureFunds Video Game Tech ETF fitting in an investor's portfolio?

Andrew Chanin: This is in the innovation area within consumer discretionary products, as well as having, like we said, these abilities to transform other industries. You hear the phrase, "the gamefication of things." This is, yes, it's technology, yes, it's consumer discretionary, but it also has the ability to leak into healthcare and other types of applications. It's tough to pin down exactly what it is. For someone that believes in the growth strategy of video game technology going forward, it can be an interesting tactical position for someone as well.

Nate Geraci: Again, we're visiting with Andrew Chanin, CEO of PureFunds. Andrew, let's now move on to the PureFunds Drone Economy Strategy ETF, ticker symbol IFLY. Great ticker, by the way. This is the first ETF focused on the rapidly growing drone market. I think many people are certainly familiar with military drones. Drones have all sorts of other applications from agriculture to construction and, of course, we're hearing about companies like Amazon testing drones for package deliveries. Before we talk specifically about the ETF, can you give us a quick overview of the drone market? What are some of the opportunities here?

Andrew Chanin: I think when people think of drones, like you said, they certainly think of the defense side. A lot of the those companies are the ones receiving major military government contracts. As this industry evolves, it started off on the defense, the aerospace defense side. Now we're seeing, because the technology itself is advancing, it could be used for so many different industries and for different applications. I think the story here is you have some potential support from the defense aerospace side, but you're also seeing many new businesses want to incorporate drones into it. It's because they're sensors, the detection. You can go to places that you haven't been able to before. We’re seeing companies need to actually start re-evaluating the way that they do business and seeing if drones can provide more efficiencies for them.

Nate Geraci: Tell us more about IFLY. How was this ETF constructed? How are the holdings in this ETF determined?

Andrew Chanin: For this fund, we had partnered with a company called Reality Shares. They have ETFs. They also create indexes. What they've done is they've developed what is called a proprietary drone score. With this, they actually calculate companies footprints in the drone market looking at publicly available data to determine which companies are actually active in the drone space. They'll give a higher weighting to a company that's say a pure play company that's actually just focusing on drones. Then you also have secondary companies, which are doing drone-related business lines, but it's not necessarily their core focus. If you look at the holdings of the fund, you'll see that the two pure play names, Parrot and AeroVironment are higher weightings. It's because of their pure play exposure. As more companies come into the space, increase their footprint in the drone industry, make it more of a focus of the company, those types of companies have the ability to also have larger weightings towards them.

Conor Kelly: Andrew, this is Conor again. Besides the pure play drone companies and a company like Amazon that everybody's very well aware is researching the use of drone technology, what's a company out there that would maybe surprise some of our listeners that is getting involved in the drone industry?

Andrew Chanin: There's companies like Ambarella, and other sensor companies, companies that are creating the input components, the chips, the cameras, things like that. There's a lot of, as we said, defense and aerospace companies. You have Boeing that people might be familiar with and some of these more defense-focused companies. We're seeing some of them are creating even submarine drones. Most people think of a drone needing to fly, but that's not what a drone is. It's the ability to be controlled from a remote location. There's many different applications. Would it be surprising to see drones in space in the future? Absolutely not. We already have these rovers that they send to Mars and things like that. These are all drones as well. I think input companies might be the ones that people aren't necessarily thinking about, GoPro being one of them. They have cameras which are used on many drones around the world and are even working on their own business line to create their own homemade drones.

Nate Geraci: Andrew, I'll ask you the same question here as I did with the video game ETF. Where does this drone economy strategy ETF fit in an investor's portfolio?

Andrew Chanin: It's a technology exposure. It's also an aerospace defense exposure. It's so neat because we're seeing all the kinds of the push and pull as regulations become more finalized and concrete, I think it would be possible to see more companies spending on investing in this. It could be an interesting agricultural play. We're seeing insurance companies are using these. I think to the extent that someone wants to get exposure to the drone industry and right now I think It's still very much so in its infancy. I think looking for transportation, or logistics exposure isn't farfetched. I think it could be a tactical exposure that someone may wish to have. For someone that believes that we're in the early stages of the drone industry and this will have a much greater impact in the world going forward, this might be an interesting exposure for them.

Nate Geraci: All right. We have about two minutes left. I wanted to quickly get your thoughts on a topic Conor and I discussed earlier in the show regarding ETF growth. I'm not sure if you saw the recent comments from Vanguard CEO, Bill McNabb where he said, "ETF proliferation has gotten out of hand." Besides just his comments, there seems to be a lot more chatter in the media recently expressing concerns over so called gimmicky, or niche ETFs. I made the point earlier that we should keep in mind there are over 8,000 mutual funds and 24,000 when you consider all the different share classes. Of course, there are only a little over 1,900 ETFs. Also, I think it's important to remember that investors can and do buy the individual stocks in all of these so called gimmicky ETF categories. I would suggest an ETF is better simply for the diversification alone. Clearly, there is some concern over ETF proliferation. I'm just curious. What are your thoughts on this debate, especially given that PureFunds does offer ETFs in some of these more narrow categories?

Andrew Chanin: We're glad that we're not considered as a gimmick ETF company. I think, yeah, there are companies that will happily launch these gimmick ETFs. We pride ourselves on not launching gimmicks. We pride ourselves on finding these emerging growth opportunities and growth opportunities within specific industries and actually building that out into an investible product. I think what we do, yes, it may be more specific than other broad-based funds, but the reason that we're doing this is because what's the alternative? Do you invest in a broad-based fund and you don't get exposure to the industry that you want, or you try to pick individual companies and then in a growth industry there's potentially a lot of volatility and a lot of company risk. This is a way for individuals to get instant diversification to these specific industries that they may believe in. They don't need to be an expert. They know that there's a professional indexing company behind this. For our drone fund and our game funds, specifically, we've partnered with industry experts that actually really understand these industries so we can provide that level of knowledge when we develop these products. I think it's ultimately going to help the companies that are doing a service to the industry and providing unique, in demand funds. The companies that try to launch gimmick funds that are trying to capitalize on a buzz word, but not really doing the research and developing them, it's going to end up hurting them in the long run. I think investors will see with the funds that we've put out there that these are compelling stories. Hopefully, more investors will look at the products that we currently have and the ones that we'll be working on going forward and seeing these as prospective opportunities to get exposure to industries that they may want to have and reduce company risk.

Nate Geraci: Andrew, very well said. We'll have to leave it there. As always, we appreciate you joining us on the program.

Andrew Chanin: Thank you Nate and Conor. Always a pleasure speaking with you guys. I'm happy to come on any time.

Nate Geraci: Thank you. That was Andrew Chanin, CEO of PureFunds. You can learn more about the two ETFs we covered along with the entire PureFunds ETF lineup by visiting purefunds.com.