Tema launches actively managed Global Royalties ETF
Tema ETFs (“Tema”) launches the actively managed Tema Global Royalties ETF (ROYA), the only ETF listed in the United States focused on royalties. ROYA seeks to provide long-term growth through investment in companies that primarily earn their revenue from royalty income. A royalty is a share of an asset’s future revenue in exchange for financing or investment. ROYA’s portfolio manager Chris Semenuk has over 30 years of investing experience.
“Royalty companies are truly differentiated businesses.” said Maurits Pot, Chief Executive Officer and founder of Tema, “For business operators, royalties offer a neat solution to finance growth that avoids equity dilution, particularly relevant in today’s high financing cost and low financing availability environment. For investors they offer structured exposure to difficultly accessible private assets, underlying commodities, and deliver equity-like returns with contractually supported income. These benefits are particularly evident in today’s high interest rate environment.”
By concentrating on sectors such as commodities, pharmaceuticals, entertainment, renewables and technology, royalties access unique private assets in sectors that have historically exhibited structural growth. Royalties could equally serve as an inflation hedge, yet we believe their equity-like growth drivers keep them relevant throughout the commodity cycle. The contractual nature of their business model means that the universe of royalty companies[1] has historically enjoyed a higher dividend yield than broader indices such as the S&P 500[2]. In an investor’s portfolio, the theme has the potential to act as a lower beta[3] diversifier, filling both the commodities and equity sleeves, while retaining an attractive income profile.
Royalty companies tend to enjoy a particularly efficient and scalable business model. As a result, royalty companies have historically outperformed mining companies and underlying commodities[4]. Royalties are also exposed to attractive attributes of their underlying assets while limiting the related risks. For example, their limited exposure to operating and capital costs significantly reduces operational risk, and they benefit from limited dilution risk given a revenue royalty will not be diluted if the underlying asset owner raises incremental equity.
Publicly listed royalty companies tend to have a competitive advantage due to their increased access to cheaper sources of capital such as investment-grade public debt. This lowers their cost of capital versus their private financing counterparts and underscores why the cost and scale of funding can be a barrier to entry for competitors. Public royalty firms also tend to benefit from more diversified portfolios, greater access to new royalty opportunities, and track records of deploying capital effectively.
“Royalties tend to serve as compelling alternative sources of financing due to their tailored and flexible nature.” said Chris Semenuk, portfolio manager of ROYA, “Royalties remain a nascent yet fast growing form of financing, which are becoming more relevant in the current high traditional cost of financing environment. We believe royalties will prove an important source of capital for the next stage of life sciences innovation, as well as funding commodity projects required to sustain global growth to avoid the inflationary supply side squeezes which we have witnessed in the past 24 months.”
[1] Universe of Royalty companies is defined by the Solactive Global Royalties Index, which represents firms earning royalties by licensing their intellectual property or tangible assets or earning revenues through royalty finance or royalty streaming.
[2] Source: Bloomberg, Tema analysis. Based on comparison of a simple average of the 10-year dividend yield for the Solactive Global Royalties Index (4.3%), S&P 500 (1.9%), and underlying commodities (0.0%). Underlying commodities represent any basic goods such as wheat, gold, oil, and cattle that an investor can purchase through the physical or futures market.
[3] Beta: measure of the volatility—or systematic risk—of a security or portfolio compared to the market.
[4] Source: Bloomberg. Based on a comparison of total shareholder return for the S&P Global mining index, Bloomberg commodities index, and Royalties which is represented by Tema proprietary universe, defined as all companies that earn more than 80% of their income through royalties. Royalties outperformed both the S&P Global mining index and the Bloomberg commodities index on a 1-year, 3-year, 5-year, and 10-year basis.
Risk Information
Before investing, carefully consider the Fund’s investment objective, risks, charges, and expenses contained in the prospectus available at www.temaetfs.com. Read carefully before investing.
Important risks
Investing involves risk including possible loss of principal. There is no guarantee the adviser’s investment strategy will be successful.
Royalty Trust Structure Risk. The success of the fund is heavily dependent on royalty investments including investments in Royalty Income Trusts (RITs). Cash flows from royalty income can be contingent on the production of energy commodities. As such, the level of income received can be volatile as commodity prices, production levels, and production costs all vary wildly. Another consideration is that some royalty investments own intellectual property. In those cases, the trust could be subject to changes in intellectual property laws, which can impact the value of the assets held by the trust. Royalty trusts generally do not guarantee minimum distributions or even return of capital. Finally, Royalty Income Investments are still subject to market risks, such as interest rate fluctuations, currency risks, and overall market volatility.
Industry Concentration Risk. Because the Fund’s assets will be concentrated in an industry or group of industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or group of industries.
Sector Focus Risk. The Fund may invest a significant portion of its assets in one or more sectors and thus will be more susceptible to the risks affecting those sectors than funds that have more diversified holdings across a number of sectors. The Fund anticipates that it may be subject to some or all of the risks described below.
Tema Global Limited serves as the investment adviser to Tema Global Royalties ETF (the “Fund”), and NEOS Investments, LLC serves as a sub adviser to the Funds. The Fund is distributed by Foreside Fund Services LLC, which is not affiliated with Tema Global Limited nor NEOS Investments, LLC. Check the background of Foreside on FINRA’s BrokerCheck.
For inquiries: info@temaetfs.com
