ETFMG and David Bolton (pictured), President & CEO at Spirited Funds explain the rationale behind their creation of an ETF focused on the world’s alcohol industry.
Q: Explain the thinking behind the creation of the WSKY ETF.
A: An investor group approached ETFMG about listing an investment vehicle that provided exposure to the global alcoholic beverage sector. There were some compelling reasons to give the space a closer look:
- The global alcohol industry was valued at USD1.2 trillion per year in 2014. It is expected to grow to almost USD1.5 billion by 2020.
- Prior to the launch of WSKY, there were no existing products providing this thematic coverage.
- The business is a truly global one (85 per cent of the world’s whiskey and spirits is consumed outside of the US) and investors wishing to gain the exposure might face challenges related to this global scope.
- The fund also acts well as a portfolio diversifier. As the S&P 500 lost 55 per cent of its value from 2007 – 2009, revenue for US whiskey producers experienced a net increase.
Q: What lies within the underlying index?
A: The names within the portfolio include global Distillers & Vinters, Brewers, and Luxury Goods makers with a significant presence in the spirits sector, such as Louise Vuitton. The portfolio is required to provide exposure within a strict regulatory framework that dictates items such as which stocks are eligible for inclusion, maximum weights, appropriate diversification and other parameters designed to ensure investors are getting the thematic exposure that they anticipate.
Q: Does this change often?
A: Although the index rebalances quarterly, the changes are generally not significant events. In most cases, changes are the result of an established brand being acquired or perhaps being listed for the first time. As an example, the tequila maker Jose Cuervo was a family owned business that IPO’ed in September of 2016. As a listed company, it is eligible to be considered for inclusion in the WSKY portfolio.
The calculation agent for the Fund continually scans all globally listed stocks to screen for eligible constituents. Those that pass all of the listing and inclusion requirements (as found in the Index Methodology Guide) are then entitled to be added to the Index, generally during the regularly scheduled rebalance cycle.
Q: Is the ETF a true representation of the business of whisky or of alcohol sales generally?
A: It is a true representation of the ‘investable’ side of the business. There is a division within the global spirits business between large global brands and smaller craft producers. On one end, there are a handful of large companies that produce under a series of labels that are familiar to most investors (Diageo, Brown-Forman, Louis Vuitton, Pernod Richard, Constellation Brands, etc.). On the other end are small, regional producers that are not listed or publicly traded and are therefore not available to investors.
Q: What affects the performance of this ETF both in terms of performance and under performance?
A: The Fund is a passively managed index tracking vehicle. As you are aware, the primary source of tracking error is usually the expense ratio.
Q: Who is this ETF aimed at in terms of investors?
A: Prospective investors would be those interested in gaining exposure to the Global spirits business. Gaining this exposure could prove problematic for the individual investor as the geographic scope is fairly intensive, including Indian, Asian, and other markets. The ETF structure is an ideal wrapper for investors seeking opportunities in this space
Q: How has it performed since launch?
A: The Fund has performed very well – it listed in October 2016 at USD25.00 and is currently trading at over USD30.00. During that period it has experienced almost uninterrupted upward movement.
- Since listing, it has outperformed the S&P500 Total Return Index by approximately 330 basis points.
- Year to Date, it has outperformed the same benchmark by over 1300 basis points.
Q: What is the size of the assets?
A: The Fund currently has USD4.5 million in AUM. Trading has been improving and now averages over 2,200 shares per day.