ETF Expert Corner

SportsETFs President Nick Fullerton Spotlights Index Behind FANZ

January 30th, 2018 by ETF Store Staff

Nick Fullerton, Co-Founder & President of SportsETFs, spotlights the index behind the ProSports Sponsors ETF (FANZ) – and offers a bonus Super Bowl prediction.



Transcript

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

Nate Geraci: The ETF we're spotlighting this week is the ProSports Sponsors ETF, ticker symbol FANZ. Joining us via phone from the San Francisco Bay Area to walk through the index behind this ETF is Nick Fullerton, Co-Founder and President at Sports ETFs. Nick, our pleasure to have you on the program today.

Nick Fullerton: Thank, Nate. I really appreciate being here.

Nate Geraci: Nick, let's start with the backstory on this index and the ETF itself. This is the first ETF of its kind. I'm curious, where did the idea for this come from?

Nick Fullerton: Well, great question, and it's a funny story. My partner and I, who's a broadcaster in the Bay Area, our kids go to school together and we were in the parking lot after dropping the kids off one day. We were just talking sports, and talking revenues, and talking ... just the excitement around the NFL, MLB, and how fast those leagues’ revenues are growing. And we kept coming back to the point that unless you're an owner who's making a lot of money, or a league who's making a lot of money, or most of the players who are also making a lot of money, there's no way for the average sports fan to really invest in the hypergrowth that these leagues are experiencing. And they're all growing much faster than the overall economy. And to take the NFL for example, they're growing ... They have a stated revenue goal of 25 billion, up from 12.5 billion this year by 2025. We tried to figure out “how does an investor potentially capture that growth?”. We went through a whole bunch of iterations of could we look at salary caps to capture that? Can we look at attendance at games or website visitors? And we kept noodling around and came up with ..."Well, who else is making money?" We kept looking, and we went back and forth and said, "Well, what about all these companies that enter into these multi-year partnerships with the league to become the league's official hotel, or the league's official car, or official credit card?" Obviously, they're doing that for a reason and spending millions, if not billions, of dollars to enter into these multi-year partnerships. So they're obviously getting some sort of ROI on that investment and potentially capturing some of that growth these leagues are experiencing. So we decided to try and create an index that captured that growth, and that was the genesis of the ProSports Sponsors Index.

Nate Geraci: Nick, you mentioned there really not being a way to invest in pro sports directly. I know there are at least a few publicly traded companies tied to professional sports. Is the problem here that this universe is just too small?

Nick Fullerton: That's exactly correct. I mean, you can potentially invest in Madison Square Garden and capture some of the New York market, or there's a very thinly traded group that tracks the Green Bay Packers, and the Atlanta Falcons just went public. But it's a very limited subset of the overall sports industry in general, and we wanted to create an index that really tracked the overall growth of the entire league, and really create a product or an index that's well diversified, has 50 plus companies in it, and, like I said, tracks this hypergrowth of these sports leagues.

Nate Geraci: Well, let's walk through the index for the ProSports Sponsors ETF. Tell us exactly how many constituents there are, how they're selected, weighted, rebalanced, anything else noteworthy.

Nick Fullerton: Sure. Well, the index currently has 68 names. There's actually 105 different potential names that could be in the index that are all official partners of these leagues or a company that has broadcast or streaming rights. But there's only 68 that qualify under our rules-based index rules. So you've got to have the designation of an official partner of the league. You have to be the official hotel, the official car, the official healthcare provider. You can't just be a company that pays advertising dollars during a game. So you've got to have a financial relationship with one of the leagues that you're a partner of. It's an equal weighted index, so we decided that no one partner carries greater weight than another partner. It's rebalanced four times a year to coincide with the start of each league's season, so we're actually going through a rebalance right now for the broadcasters and streaming relationships. We have a rebalance in April to coincide with baseball, a rebalance in September to coincide with football, and then one in November for basketball and hockey. These companies have a minimum market cap of a billion dollars and have to be very liquid. And they have to trade on US or Canadian exchanges or have ADRs that trade on those exchanges. The index is comprised of about 85% US domestic companies and about 15% of developed international companies. And some of those international companies everyone listening to the show probably knows. For example, Budweiser, SAP, Barclays, Canadian Tire, Restaurant Brands International. So they're all big, well-known companies that have enough free cash flow really to enter into these multi-year agreements with the leagues to capture some of that revenue growth.

Nate Geraci: You alluded to the four sports seasons. I just want to be clear here. These are pro sports sponsorships for the MLB, NBA, NFL, and NHL. Is that correct?

Nick Fullerton: That's correct. It's what we like to call the four core US sports leagues, so NFL, MLB, NBA, and NHL.

Nate Geraci: As you mentioned, I was looking at some of the companies in this index, and they're certainly exactly what I'd expect. You mentioned Budweiser, I know MillerCoors, Foot Locker, Nike, Under Armour, Adidas. I think all familiar names for anyone who follows pro sports. Are there any less familiar names that people might be surprised to find in this index?

Nick Fullerton: There are actually a bunch that really believe in the power of sports that you would never associate with a sports league. Cisco is a great example. They're the power behind the internet. They build networks, but they're using their partnership with the leagues to not only showcase their technology externally, but also to use it as an internal sales tool showing, "Hey, we're building networks and helping the leagues with their technology, we can really show our customers and partners how this works and how this might work for their business." Another interesting name on the technology side: SAP is an official technology partner of one of the leagues. And then you've got your traditional, a lot of banks, and a lot of financial services companies. And as these leagues grow, they're looking at partnership revenue to really help grow their overall revenue. So they're really expanding the categories that are available as an official partner. It's not just the official bank now of a National Hockey League. There might be an official credit card or an official payment provider or an official brokerage of the National Hockey League. So these leagues are really giving companies the opportunity to participate and activate their marketing spin within the leagues at a variety of different levels.

Nate Geraci: Our guest is Nick Fullerton, Co-Founder and President at SportsETS. We're spotlighting the index behind the ProSports Sponsors ETF, ticker symbol FANZ. Nick, let's talk about the investment case here. Why invest in the sponsors of professional sports leagues, if you were to boil this down?

Nick Fullerton: Well, it really goes down to the companies that are deciding to partner with these leagues are really investing in their sales and marketing budget. And they're doing that with a really dedicated and loyal group of people. Sports fans, as you know, are some of the most dedicated and passionate people around. And if the companies are doing ... When they launch these partnerships and they go through these partnerships, if they're activating that partnership – and when I say activated, they're doing a campaign, television, print, social - if they're activating that, there's been some studies, and a really good one by McKinsey back in 2014 saw that these companies can potentially get a 30% ROI growth versus their competitors if they have a solid campaign with these leagues. So these are companies that have free cashflow, enough free cashflow to enter into these multimillion, multibillion dollar partnerships with the leagues. And they are really looking to grow through that partnership to a really loyal and dedicated fan base. It's all about branding, marketing, loyalty, and really an internal boost to their overall growth story and internal passion for the employees of these companies. So it's a very strong group. I almost like to call it blue chips that still want to grow, and they're using sports to really grow their business.

Nate Geraci: Nick, earlier in the program Conor and I were discussing that some thematic ETFs seem to get a bad rap. And I know you've dealt with this a little bit, people saying FANZ is gimmicky, it's just marketing. But you actually had what I thought was a really good response to the New York Times. You said, "People get sports. People get advertising. A lot of products you need a PhD to understand." And I think this gets back to investing in what you know. Can you maybe expand on that a bit for us and talk about your feelings on thematic ETFs and, of course, your index in particular?

Nick Fullerton: Absolutely. That's a great point. I mean, there's so many products now that, whether it's smart beta or factor products, that it's just really hard for the average investor to understand what's exactly in this thing and how's it going to react? Where, as you just said and I've said before - and this goes back to Warren Buffet and Peter Lynch, some of the legendary investors out there - invest in things that you know. And so if you're watching sports all the time, you see these names pop up on your screen, whether it's through your tablet or on the TV, or if you're streaming on the computer or on your phone. These are all companies and brands that you know. You understand what they do. And from a thematic standpoint, I like to tell my clients to invest in things that they understand and they know. If we're talking about thematic indexes, if you're passionate about a sector or a brand or whatever theme it might be, it's something that should definitely be considered as part of your portfolio. And the name thematic, I think, is just a catch phrase that has come up recently. I mean, people have been investing in themes for decades. When you go back in the '80s, and you talk about personal computers, that's a theme, but there wasn't a thematic product to capture that theme. So our theme is sports, and it's really about looking at an index that is similar to the S&P 500, but tracks the overall growth of these companies through a sports specific lens.

Nate Geraci: Nick, we have just a few minutes left here. I know you can't talk specifically about other potential indexes you might launch, but I'm curious, are there any other sports related themes that you could envision packaging up into an index?

Nick Fullerton: Absolutely. I mean, we're looking at just the core four sports leagues, with the ProSports Sponsors index, but there's obviously other sports and recreational leagues and venues around the country and around the world, for that matter. So there are other ways we can slice and dice this, and we've designed some other indexes that we're obviously not at liberty to discuss right now. But there's some other products that we'd like to release down the road.

Nate Geraci: Alright, lastly here, I'm going to put you on the spot. Super Bowl Sunday is obviously this upcoming Sunday. Do you have a Super Bowl prediction for us?

Nick Fullerton: Oh, I knew this question was going to come, given we're only a few days away from the biggest sporting event on the planet. It would be easy for me to say let's go with the Patriots. They've been there. They've done it before, and Tom Brady is obviously superhuman. But I really think the Eagles are going to come through this year. Part of that is Zack Ertz. I've got an autographed football from him in my office, and he's from my alma mater. Plus, I really think their D-line is going to put a little pressure on Brady up the middle and not allow him to sit in the pocket. So I'm going to go with the Eagles winning this one.

Nate Geraci: That's awesome. Well, you know what? Let's hope it's a really good game that goes late into the fourth quarter so all of the advertisers and sponsors get a tremendous amount of exposure.

Nick Fullerton: Alright. Thanks, Nate. Thanks, Conor. Appreciate it, guys.

Nate Geraci: Nick, we'll have to leave it there. Very entertaining spotlight today. I think the perfect ETF for Super Bowl week. And, Nick, we certainly wish you all the success and appreciate you joining us on the program today.

Nick Fullerton: Thanks, guys. I appreciate it.

Nate Geraci: That was Nick Fullerton, Co-Founder and President at SportsETF. Again, the ETF is the ProSports Sponsors ETF, ticker symbol FANZ. And you can learn more about this ETF by visiting sportsetfs.com.