Roundhill Investments has launched a new thematic equity ETF providing exposure to growth-oriented companies associated with the digital infrastructure sector.
Will Hershey, CEO and co-Founder of Roundhill Investments.
The Roundhill IO Digital Infrastructure ETF (BYTE US) has been listed on NYSE Arca with an expense ratio of 0.75%.
Roundhill defines digital infrastructure as the high-tech physical assets that power the internet by supporting the efficient storage and transmission of data.
These assets include fixed-line, high-speed data transmission technology and hardware (such as fiber optic cable), data centers, mobile towers, and other long-lived physical infrastructure assets.
The digital infrastructure theme appears well-placed to prosper throughout the decade as the emergence of new digital technologies, the growing connectivity across Internet-of-Things devices, and the greater adoption of cloud computing, 5G, artificial intelligence, online gaming, social media, streaming platforms, and AR/VR are almost certainly likely to drive robust demand for digital infrastructure assets.
According to Roundhill, businesses focused on digital infrastructure assets are typically characterized by long-duration recurring cash flows, secular growth, inflation resilience, sound financial positions, and strategic competitive positions.
Will Hershey, CEO and co-Founder of Roundhill Investments, said: “We believe digital infrastructure is the backbone underpinning the growth of the consumer internet globally. Whether you’re playing Roblox, hosting a conference call on Zoom, or trading cryptocurrency, you are relying on the physical infrastructure assets that enable high-speed data transmission. With BYTE, we are seeking to provide retail and institutional investors with a vehicle to invest in the potential growth of the internet, while offering the potential for the stability and cash flow profile of hard assets.”
Methodology
The fund is linked to the IO Digital Infrastructure Index which was developed by IO Digital Index Partners, a newly formed indexing and research firm.
The index selects its constituents from a universe of developed and emerging market companies with market capitalizations above $250 million and average daily trading volumes greater than $1m.
Eligible companies must derive at least 50% of their revenues from digital infrastructure assets, while an index committee removes firms that rely on legacy technologies or are in highly competitive services industries.
IO Digital Index Partners then harnesses its proprietary research to assign each firm in the eligible universe with a ‘GVS’ score based on three fundamental factors: Growth (growth of gross revenue and profitability), Value (based on various price multiples), and Soundness (reflecting balance sheet strength and ESG profile).
The methodology then selects and weights 40 constituents using a smart beta approach that aims to maximize the index’s GVS score while accounting for various constraints including capping the weight of any stock at 7%, ensuring at least 65% of the index is allocated to US-listed companies, and capping the weight of developed non-US stocks and emerging market stocks at 35% and 15%, respectively.
The index is reconstituted and rebalanced on a semi-annual basis.
As of 27 October, 65.0% of the index was allocated to stocks from the US with the next-largest country exposures being Australia (8.5%), the UK (6.7%), and China (4.4%). The index’s thematic relevance breakdown was tilted primarily towards firms with operations in fiber optic cables, at 57.7%, with towers (23.3%) and data centers (18.2%) also playing significant roles.
Notable positions included Charter Communications (6.7%), Uniti (6.7%), Liberty Global (6.7%), American Tower (5.8%), Cable One (5.7%), Altice USA (5.3%), Lumen Technologies (4.8%), and Crown Castle International (4.6%).
BYTE is the latest in a series of thematic equity ETFs launched by Roundhill. Existing products include funds providing exposure to esports, sports betting, streaming, pro sports, and the metaverse.
Investors looking to explore the digital infrastructure theme can also look to the Nasdaq-listed Global X Data Center REITs & Digital Infrastructure ETF (VPN US). This fund, which launched in November 2020, tracks the Solactive Data Center REITs & Digital Infrastructure Index, an index reflecting the market-cap-weighted performance of companies worldwide that generate at least 50% of their revenues from data centers, cellular towers, and/or digital infrastructure hardware. VPN houses $75m in assets and comes with an expense ratio of 0.50%.
European investors seeking a similar exposure could look to the Digital Infrastructure & Connectivity UCITS ETF (DIGI LN) sponsored by Quickro in partnership with HANetf. This fund is linked to the Tematica BITA Digital Infrastructure Index and maintains listings on LSE, Xetra, Borsa Italiana, and SIX Swiss Exchange.