ETF Issuer Roundhill is no stranger to breaking new ground with cutting-edge (some may say "bleeding edge") thematic funds such as The Sports Betting & iGaming ETF (BETZ) , The Esports & Digital Entertainment ETF (NERD) and The Metaverse ETF (METV) , the latter being the fund that gave up its original ticker (META) so that Facebook could finalize its rebranding. Now Roundhill is pushing the envelope once again with a filing for two single-name ETFs.
There have been a number of single-stock ETFs filed and launched in the past month, but all those have been focused on providing investors with leveraged exposure to relatively volatile US equities such as Tesla (TSLA) , Microsoft (MSFT) and Alphabet (GOOGL) . The big leap forward with this latest filing is that Roundhill is looking to provide investors with exposure to locally listed shares of foreign companies. It's important to note that the funds I'll talk about have yet to start trading.
The Funds
You may recall that a few years ago exchanges all over the world were getting very excited because one of the world's largest companies was looking to finally list its shares after remaining private since its founding in 1933. The joint venture launched by Standard Oil and the Saudi government started life as the Arabian American Oil Company and since has rebranded as Saudi Aramco.
I was working at the New York Stock Exchange at the time, and let me tell you, a lot of midnight oil got burned trying to nab that listing. At the end of it, though, executives at the company decided to give its own country's equity markets a boost and listed shares on the Tadawul, or Saudi Stock Exchange. To date, the only way for investors to invest or trade these shares is by transacting locally, in Saudi Arabia. There is no UTP (Unlisted Trading Privileges) access for this name. As you may guess, one of the funds will provide US investors access to the locally listed shares of Saudi Aramco (local ticker 2222 on the Tadawul).
The other fund is slated to provide exposure to the locally listed shares of South Korean technology giant Samsung (local ticker 005930 on the Korean Stock Exchange). Unlike Saudi Aramco, Samsung is either cross-listed or has depository receipts listed on a number of global exchanges, including the OTC (Over-The-Counter) market here in the US as (SSNLF) . Given this, you might be wondering why Roundhill would take the extra step of wrapping essentially already available shares in an ETF structure. To me, this is where it gets interesting.
Single-Stock ETFs: Not Just for Retail
If you've ever looked through the holdings of a global fund from iShares you'll see that they have amazing geographic reach and have names in the portfolio from countries you may not have even thought about from a capital markets perspective. A big part of why and how they can do this is that they want to provide investors with as complete an exposure as they can and have enough scale to be able to afford to do so.
Trading emerging or frontier market stocks can get expensive. Custody banks charge higher fees to hold on to those names, extra traders are needed to man third shifts (or be placed locally), and then there are the data costs that can pile up. I once worked with a group that had the idea to build a Pacific Rim country rotation strategy index that would have involved 19 countries and the index data costs alone were north of $300,000. One workaround we talked about was to use US-listed ETFs as proxies for those countries and run the strategy as a fund-of-funds product, but the group's strategy was to actively pick names in country, so they needed access to component data.
While the fund-of-funds approach didn't work for that client, the availability to smaller institutions and ETF issuers of names such as Saudi Aramco would be a game changer for many, eliminating overhead and operational costs associated with trading these kinds of stocks. You may still be asking, "What about Samsung? What's the advantage there?" but due to reporting regulations, ETF issuers can't hold OTC names outright. If a fund wants to own OTC names, it either must enter into a swap agreement or set up an offshore entity to hold those names and then the fund can hold shares of the offshore entity. Essentially, there are hoops to jump through that are somewhat complex and not cheap.
A New Frontier?
I'll waive my usual consulting fee to offer this guidance to the folks at Roundhill, which is that if you can find a way to get these funds to market, please do. I think this kind of access is a potential game changer for not just retail investors but also small to midsize ETF issuers as well. And given the opportunity, these players will embrace foreign single-stock ETFs, with the right price point, of course. An interesting filing that, as I like to say, is worth a closer look.
