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When you think about hot sectors, what comes to mind? Crypto? Cannabis? How about video games?
In this episode of the Fintech Focus podcast, Evolve ETFS CEO and Founder Raj Lala talks with Benzinga about why he believes ETFs are ideal for capturing growth in new and evolving industries, and why their new e-gaming ETF, HERO, will be among the hottest performers in the space.
In The Beginning
Before launching Evolve ETFs in 2017, Lala had an impressive track record in the financial space, running retail for Fiera Capital and spearheading the launch Jovian Asset Management, part of the larger Jovian Capital. Lala eventually moved on to head the Canadian branch of WisdomTree ETFs, one of the largest ETF providers in the world.
However, while running WisdomTree, Lala missed the entrepreneurial independence he had with Jovian Asset Management. Following that feeling, Lala noticed that the Canadian ETF space was overly commoditized and saw the potential in non-traditional ETFs to thrive.
“I mean, when you look at the ETF space in Canada today, there's over 800 funds,” Lala said. “We have an oversupply of products, but many of them are commoditized versions of each other. I didn't feel that this country needed another TSX 60 ETF or another Dow 30 ETF. I wanted to focus in on really two pillars to the business, one that was more underserved and the other that was unserved in the marketplace.”
Generating An Idea
When evaluating a fund idea, Evolve ETFs attempts to avoid “fad” industries by looking closely at sectors and technologies with a good long-term investment thesis behind them. However, Lala believes there is first mover advantage in the Canadian market with these cutting edge areas of the market, such as the continued demand increase for cybersecurity services by governments and corporations.
“When we launched Canada's first cyber security ETF, everyone agrees that cyber crime's going to continue to increase and the demand for cybersecurity services and spending by our government agencies and by Fortune 500 companies is going to continue to increase to protect themselves from cyber breaches,” Lala said. “Therefore, it makes a great long term investment thesis.”
Still, Lala has run up against investors wary of particular ETF ideas, but it’s usually because clients do not always realize how quickly industries are evolving.
Lala explained, “We tend to overestimate the kind of changes that are going to take place over the next two years. We tend to underestimate the kind of changes that are going to take place over the next 10 to 15 years. To me, that's the hardest part: convincing people that the world is changing significantly, and your day to day life is going to change significantly with the improvements in technology.”
In June, Evolve ETFs launched the Evolve E-Gaming Index ETF (TSX:HERO) Canada’s first esports ETF. Initially, Lala himself was skeptical of what colleagues and investment advisors were telling him about gaming’s market potential. However, after performing some research and realizing that there are nearly 2.2 billion ‘gamers’ in the world across an array of demographics and revenue streams, he was sold.
“It's not just your teenage kid in their basement playing all night,” Lala said. “It's 45-year-olds waking up on Saturday morning and going on at the same time as their other 45-year-old friends and playing an esport together against other teams. So, I realized after doing a lot more research how big the potential was for that market, and that's why we decided to file for the first egaming ETF in the country.”
That aspect of addressing ignored or underserved markets has itself become an emerging feature of ETFs. Thematic investing now allows individual investors to demonstrate and hold stake in specific interests or beliefs, which prompted Lala to pursue funds like Evolve’s Gender Diversity ETF.
“It (the idea) could be a view on a sector like autonomous cars or egaming,” Lala said. “But it can also be a view of society. They're (millennials) very supportive of supporting climate change. They're very supportive of increasing gender diversity in the workplace. So, you have to move with that demographic.”
The Active/Passive Challenge
While Evolve’s mission is very much forward-looking, that comes with the challenge of effectively communicating how their products are built to function. New investors might be unaware of what an ETF is, while more seasoned traders might just see them as a way to access cheap beta. But Lala is keen to make sure Evolve caters to all kinds of investment styles and objectives by offering both indexed and activity managed ETFs.
“One of the reasons why I launched activity managed ETFs is because I felt that, from an advisor's perspective, it's much easier to jump from actively managed mutual funds to actively managed ETFs versus jumping from actively managed mutual funds all the way to pure beta, cheap, passive ETFs,” Lala said.
This mission to cater to individual trader types also informed how Evolve prioritizes lines of communication, between them and investment advisors and, eventually, to investors themselves.
“Today, probably about 30% to 35% of their [investment advisor] time is being spent on compliance,” Lala said. “The challenge for us and a lot of issuers out there is getting facetime with the investment advisor, and many times that's because they are burdened with all of these extra operational and compliance work.”
This week’s episode is sponsored by Evolve ETFs.
Listen to the full podcast below for more.
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