ETFs have traditionally been a means of tracking an index like the S&P 500, with investors shunning higher active manager fees and having to do little in the way of DIY stock picking.
But the past few years have seen the emergence of thematic ETFs. These typically focus on a given sector, like cybersecurity or robotics.
We recently added for of Rize's thematic ETFs to the platform and, in conjunction with that, caught up with Jason Kennard, one the company's co-founders. During our chat we touched on what thematic ETFs really are, how they're put together and the fees investors have to pay for them.
You can watch a video of the interview below or read the transcript.
Hi everyone and welcome to another executive interview here at Freetrade. My name is David Kimberley and I'm part of the editorial team. A quick reminder before we begin to sign up for Honey, our daily market newsletter. You'll get an email into your inbox every day with market updates and other interesting bits of news.
So today I have with me Jason Kennard, who is a Co-Founder at Rize ETF. And we're going to be talking a bit about the four ETFs that Rize has on offer, which are now available on the Freetrade app. So, Jason, thanks very much for joining us.
No problem at all. Thank you for having me.
So to get started, can you talk a bit about what Rize is, what you guys do, what the goals are, all those sorts of things?
Yeah, I’ll just dig in. So Rize is an issuer of exchange traded funds, or ETFs as they are known. We actually specialize in thematic ETFs. We founded the company in 2019 and went live with our first two ETFs in February 2020, literally just before the pandemic took everyone by surprise.
So we've got team members that we haven't actually worked together in an office with because everyone's been based from home. But I think that's just a sign of the times and probably the same for most people.
But the company was founded by four partners. That's Rahul Bhusan, Stuart Forbes and Anthony Martin. And of course, myself, we all used to work together at ETF Securities and LGIM. LGiM purchased the business, the ETF business, back in 2018. So we all worked together for quite a long time. We've got a kind of a complementary skill set and we enjoyed working with thematic ETFs and actually were the team that built the first robotics ETF in Europe in 2014.
So we felt this is our destiny, to continue building out thematic funds, which we all enjoyed, you know, researching, talking about and actually creating and listing them on the stock market.
But Rize came into being, well, we're having a coffee with the founders and we're all throwing out ideas for the names of the new business, some good, others pretty bad. And then Stu got a text from a friend who suggested Rize with a Z. Now, I'm not sure whether he asked for help, you know, cry for help or whether it was just volunteered. But once he told us about the name, there was a bit of a silence. And I think somebody said, “I don't mind it.” And then kind of everybody else followed suit. So we said, “OK, if there's not a better name then the name of our new business would be Rize ETF. And, of course, there wasn't a better name. And the rest is history, as they say. And our company was formed.
That's a good story. I won't ask what the names were, I think, well, maybe that can be another interview. So as I said at the beginning, you have your four thematic ETFs at the moment. Those are focusing on I think one on the cannabis sector, one on digital learning, one on the future of food or sustainable foods, and then another on cybersecurity. I mean, I don't want you to go too much into detail on each one, because I think that'll take a while. But just in simple terms, I mean, why those four? Why did you start out with those four?
OK, so we launched the first two, which was cybersecurity and medical cannabis. They were kind of our first babies, as it were.
And we actually had a history working with the cybersecurity team because we built one for L&G and we felt it could be improved. It was such a topical theme that almost you turn on the news and there's a news story of some description, some ransomware or data breach or privacy concerns.
So it was in our DNA, if you like. So we wanted to bring out a new one. Perhaps you had some slight improvements, had a slightly better revenue score, and that the team management fee was a little bit cheaper. And also we wanted to exclude controversial weapons in that.
So we kind of thought it was a bit like a cybersecurity 2.0. So that was our first one. And some of them we’re quite proud of. And then medical cannabis. I think it was just something that was hard to ignore. There's such a build up of momentum in news stories globally about cannabis and, you know, the sort of social stigma coming away and people becoming more comfortable with it.
You know, these stocks were doing sort of, you know, roaring performance. And it was something that we really wanted to bring to the market. I mean, we noticed there wasn't anything in Europe at the time. So it was a difficult product to bring. You know, we had to go and look at a lot of the legalities of where it could be listed. But to be clear, we're not talking about recreational cannabis. We're talking about medical cannabis, which is legal.
So that was really the rationale for those two. So those are two kind of blockbuster products. And then the next two came about six months later, and that was educational technology and sustainable future food, both first market in Europe. And we felt that the tech sector was a little bit ignored. So you speak to most people, they know a lot about FinTech. I can tell you all the great stories and companies, but educational technology was really growing quietly in the background. But, you know, doing some great growth of these companies and developing that.
We thought that this was a very sustainable long term theme that we want to be part of. So we launched that tech and then sustainable future of food was a real labor of love, you know, took a long time to sort of put together the taxonomy of the index. But there was a real gap. We felt as well that, you know, people look at energy transition and what's happening in that market. But really, the food market was kind of ignored and we felt that, you know, somebody really needs to represent that potential investment opportunity in Europe. So that was our fourth ETF.
Yeah, that’s very interesting. And I mean, I'm sure you've seen some decent inflows since you started, but which of those has been the most popular of the four, would you say?
So I would say without doubt it's the food product. I think it's just captured everybody's imaginations. I think there's been some big, big name companies in the US like Beyond Meat and Impossible Foods, which isn't listed.
But I think it's really everybody wants to do a little bit more for the environment. And, you know, plant based is gaining a lot of traction. And I think we want to go to a beach. We don't want to have plastic washing up. We don't want to see massive waste land dumps and things. And I think this ETF really focuses on those kinds of concerns and the balance of power going back to the consumer, if you like.
If they make the choice to eat with a company that's better positioned and helping the planet and they invest in them, then hopefully, over time, the companies which are not so good will transition to what they're doing. So it's the right way. So, yeah, the food ETF has seen quite good performance and really good asset growth. I think we're at $230m since its inception in August last year. So we're very pleased with that.
Wow. And you mentioned when you were talking about the ED tech sector, you felt that it had been ignored, which I think I would agree with. So just from putting the index together and working on the project and that sort of stuff, are there any opportunities in that sector or any companies, pieces of technology and so on, that you think are particularly interesting that people should be conscious of as investors?
Well, I think that with ed tech, it's it's I think it's a bit of a global phenomenon. And you've got companies in India that were unheard of before. And [other companies in] China that had just come into the market. You had Coursera hold an IPO recently.
And so I think that people would get more used to these things. But, you know, one of the soundbites that I heard recently is that they're going to have two billion more learners between now and 2050 and that education only has a three per cent digital penetration.
So there's so much more work to be done in sort of developing countries that need to go online. And I also think that the labor market, you know, I think gone are the days where you went to university, got educated, you went to the workplace, you retired. It's almost as if you need to continue learning because those skills are changing and we need to evolve and you need to upscale what you're doing. So I think that's got a really nice long term potential and is a good growth opportunity.
Yeah, well, I mean I can relate because during the past 12 months, I had to do an entire course online, so I guess I'm part of that growth story. To change tack a little bit, we're talking about thematic ETFs, but I haven't really spoken about what they are. And I think most people watching will probably understand superficially what it is that they're buying into. But I think what you guys do, it's slightly different than your run of the mill S&P 500 tracker. So, I mean, can you talk about the process of creating one? Is it you who is putting it together or are you tracking an index that someone else has put together? What does it look like, I suppose is the best way to ask this, to build a thematic ETF?
Sure. I think the key difference for us is that we work with a thematic expert in their field. So for our cannabis product, we worked with New Frontier Data. That's a US specialist in analysis and research in the cannabis field.
In cybersecurity we wanted to match up with the research from specialists based in Washington. So what we do is, we don't claim that we're the experts in all of these things, but we look for people that are and that essentially they can create a very, kind of, purpose-built index which really captures the area.
So I think just going back to what you mentioned about you, let's say, one hundred companies in the UK put it together in one share. We look at a theme that has the potential and the long term to really grow. So cybersecurity, what does that mean? So it's companies that are defending other companies from cyberattacks on mobile hardware and software. It might be a consultancy or it may be companies that are specialists in penetrating environments to make sure they're safe from hacking and things like that. And it's really mature and there's a lot of new companies coming into it.
So we will look at the global environment, as opposed to just in the U.K. And so we look at all countries which are really developing new and interesting businesses that have the ability to grow over time. So, as I say, we work with experts. They put our stock universe together and then we add some filters to that, things like purity score, so in cybersecurity should you have a company that’s got five percent revenue returns from cybersecurity and the rest is doing something else. Probably not.
So we're looking for companies that are real pure players in what they do. And then we have the kind of the standard filters, such as liquidity and market cap and things like that. Then we have an exclusion list. So companies, we feel that shouldn't be there.
I mentioned controversial weapons and cybersecurity. That's kind of another field altogether. We don't feel that that should be in our index.
And then it's given to an index provider and coded like a standard index, with an index methodology. And then literally all the ETF will do is it will replicate, physically replicate, all the underlying shares in that index and we will purchase them physically or the investment manager will. So I think from that sense, it's passively replicated but perhaps there’s an active element or discussion around the index. And I think getting that right and getting that theme as pure as you can, and once we're comfortable with that, then we're happy to build an ETF.
Yeah, that was something I was going to touch on as well, which is, I mean, Rize doesn't seem to be exactly like ARK or something in the US, which I think is probably much more active. But there is, I suppose, still an active element to it in the sense that you're having to come up with some criteria, as you mentioned, and then pick stocks to include. So, I mean, if if someone is, let's say, anxious about stock picking of some description and feels that it's not worth the time or something, I mean, what would you do if someone comes to you and says you, “I don't feel comfortable investing in this because I don't like funds that I feel are actively managed.” What would you say in response to that? Do you think that's fair?
Well, I think from my point of view, there's a time and a place for active, and there’s a time for passive. I think personally, if you ask me, what are we doing? We are passively investing because the index is codified. But what I think there is, are inputs at the index stage and I think a lot of discussion to get the taxonomy of that correct. I think our food index probably took about 10 months to put together because they wanted to get it right and they wanted it to correctly reflect the theme. So I think there's a lot of discussion at that stage, but once that's kind of agreed and locked in, it just becomes a regular index that's passively managed.
OK, that's that seems like a fair response and I mean, a bit of technical question. Again, let's say I have something like a UK 100 ETF and there's a rebalancing of, I think, every quarter for [the index]. And then you might have firms dropping in and dropping out. So is there a kind of similar process for Rize?
Yes, there is. And that's all detailed in the index rules and index methodology. So our indices rebalance twice a year. So it's a very transparent process. And, you know, anybody in theory could read that and replicate the index and follow the rules.
OK, that's good to hear. So I think that you guys are, as you mentioned, the first in Europe to do what you’re doing in many ways. And I think again, if you look at comparisons with the US, where there's more companies doing similar sorts of things, you tend to have a slightly different fee structure to the run of the mill ETF. So can you talk about a little bit about the fees that various investors have to pay relative to other ETFs?
I’ll probably just comment on the, you know, what I call a UK tracker or, you know, the DAX in Germany or the CAC in France, those have become very kind of standardized, very easy for firms to replicate, so the costs are being reduced. So there's been a lot of fee compression.
You know, they probably in the old days started off around 50 basis points. You could probably do some of those now for five. So the market for that has really come down. It's about scale for those issuers. And that is a very efficient ETF tracker.
And the thematic, I think there’s a little bit more involved. As I mentioned, you know, we work with experts, so there is a cost involved. I think if you look at the thematic market, we're covering global companies, not covering just say, the UK market. There's more inherent cost there.
And I think the range you'll see is anywhere from 40 basis points, up to 75, 80 basis points in the thematic field. Most of ours, or three of ours, come in at 45 basis points. So at the lower end of the thematic space and I do think that's fair value.
Our cannabis ETF has a management fee of 65 basis points. And again, there is so much work and legal work that we have to complete, hence the slightly higher fee. But I think that to give you global exposure to many stocks in this sort of emerging theme is a very fair price indeed. But to go back to the point, the FSTE fee compression, it's all great for investors because they've got a lot of choice and they've got cheap fees.
Yeah, well, I think just getting feedback from people using our platform, I think in general they would be happier to pay for higher growth, although I suppose that's true for investors in general. But moving on a bit, can you maybe talk a little bit about what Rize has planned for the future? Can we expect more ETFs being issued? Are you just going to focus on the ones you've got? What's next?
Yeah, that's a great question. So we are expanding. We have got a very robust pipeline of new ETFs and exciting things, but they're all at different stages of development because, you know, some of them take a longer time to craft and some of them we just can't get out in a short space of time.
But I'm pleased to report we've got two new ETFs coming out at the end of this month. I would say it's no surprise that they're going to be thematic ETFs. I can't give you the exact details until they're sort of ready and approved. But what I can tell you is that they’re global equities. One is in the fintech arena and one is in the environmental arena.
So we're working hard to get those delivered in time for the end of this month before everyone kind of goes away for summer. And then we've got a really robust pipeline behind it. And I think the other major thing is that we're in the process of expansion. So we've just hired a legal counsel. A lady joins us at the end of this month to help out with product development. She's a fund lawyer, so to build our new fund range. We’ve also got product specialists and some business development people.
So, you know, we are really looking to expand the business, but we are looking for quality, not quantity. We don't just want to launch 20, 30 funds and see which one works and go and close them. We want to launch really interesting funds. And I think the difference is we're really mad about content and good content and education around the theme.
So if you go to our website, we've got a research and insights page and you can read white papers, which are up to an hour of reading, or you can have blogs two to four minutes and they can give you a real update about what the theme is doing, what's it done in the quarter and what subsectors are made up of or what the future outlook looks like.
And I think now we really want to continue with that and to really give something to people so they don't just buy a fund and kind of walk away, that we're actually going to be with them the whole step of the way, all of that journey, and really advise them on what are the developing things in that field. So onwards and upwards of.
Yeah, that sounds good and, for anyone watching it, I actually recommend your paper on ETF liquidity. I found it very helpful.
So I was actually done by one of my colleagues. And it's actually a question we do get asked from time to time. So we felt that it was important to put something out there that I'm sure we'd be happy to come and talk to you about that. More detail.
Maybe that would be an interesting topic because I think, from the point of view of a regular investor, I think most people are familiar with the relationship between a share in a company and perhaps how it's traded and so on. But maybe to finish off, can you give a brief overview of how a company like Rize actually interacts with its ETF and how that sort of functions? Because, I mean, there's a relationship between the ETF price and the price of the underlying. And I think people maybe don't exactly understand how that works.
Sure. I think if you look at what Rize is doing, we are the product strategy. We think about research. We get the partners and then we develop and we build the products, we create it. And then what we do is we list that as a fund. So as in the name Exchange-Traded, it goes on to get listed on the stock market, in this case on the London Stock Exchange.
And generally you have a market maker that will stand behind the pricing, so that if you want to buy or sell, they can come up with a price. So another function of an ETF issuer, is that we handle the ETF capital market space. So it's what's called the primary market. It's not so relevant to the retail market because I mean, just like the UK's biggest companies, whether it's HSBC or Vodafone, they can go to the Freetrade app. They can see the price and they can buy a share. There shouldn't be an issue there.
But for larger institutions, they might like to deal directly. So there's a thing called an AP, which is an authorized participant, and it basically means they can accept orders from brokers or other market makers and they can create [new shares] directly with the fund. But as I say, for the sort of retail market that’s the secondary market. So I think the important thing is that the market maker always has a bid/offer price and people can freely trade. And I think the majority of cases that and then I think for us generally, where the promoter of the market share of the fund, I think that probably covers that off. Any other specific questions I may have missed?
No, I think we’ll have to save that one for next time. But I mean, maybe my final question is, do you think you will stick purely with thematic ETFs or do you see yourselves eventually moving into those standard index funds as well?
It's a very good question. I think we want to specialise in the thematics. That’s where we feel we add value and that sort of getting good partners to come to market and being really good at content. I think that there's a lot of large providers that offer FSTE, so there wouldn't be much value in us adding something like that. But perhaps where our future could be is more along the sustainable path. So, if you like, sustainable thematic. So maybe that's our area. But in this business, never say never. In a couple of years time, we might have a great opportunity to do something that adds to our repertoire and so on.
Great. Thanks very much for joining us today. It was a really interesting chat. And yeah, we'll have to get you to come back when you launch those other ETFs.
You too, yup, we’ll be happy to do that.
Thanks very much, Jason. And just a reminder to everyone else, remember to sign up to Honey and get those market newsletters every day into you inbox and join us again soon, hopefully for another interview. And thanks again, Jason.
Thanks to you as well.