The music industry has given us head-to-head battles over the years: Kanye West and Taylor Swift, Mariah Carey and Jennifer Lopez, Oasis and Blur, Tupac and Biggie, Paul Simon and Art Garfunkel, almost every member of the Eagles, Neil Young and Lynryd Skynyrd and of course, Yoko Ono and the entirety of The Beatles fandom. Now comes the latest battle of the bands. Oops, I meant to say funds. Funds? (Cue the record-scratch sound).
From the early days of Gennet Records, Sun Records to Motown Records, through Elektra and all the other major and independent -- "indie" -- labels, the music industry has consistently done one thing: Make money, lots of it. Can you believe that July 2023 marks the first time that retail investors have an opportunity to invest in funds that look to provide direct exposure to this century-old industry? And it's not just one fund, but two. Let's take a look at these two new funds, the MUSQ Global Music Industry ETF (MUSQ) and the Clouty Tune ETF (TUNE) .
MUSQ vs. TUNE
Both funds are passive, meaning they each track their own underlying index, which is where we will go to learn about the security selection process for each product.
The MUSQ Global Music Industry Index is provided by noted thematic index provider EQM Indexes. Per the methodology guide, the security selection process for this index includes focusing on companies that either have at least 50% revenue exposure to the global music industry. Companies can also qualify for inclusion if they "are in the top five companies by global market share in or have at least 10% of the global market share of" industry segments which include music streaming, music content and distribution, live music events and/or ticketing, Satellite and Broadcast Radio or Music Equipment and Technology. These are admittedly fairly broad definitions so let's take a look at the final portfolio holdings to see what kind of exposure investors can expect.
Names in the portfolio track with my expectations. There is a good mix of traditional and new technology companies here, like Warner Music Group (WMG) , Madison Square Garden Entertainment Group (MSG) , Sirius XM Holdings (SIRI) , IHeartMedia (IHRT) as well as streamers Spotify Technology (SPOT) , Cloud Music (9899-HK), and CLIQ Digital (CLIG-DE, (CLQDF) . Also included are high-end consumer audio equipment providers, Bang & Olufsen A/S (BO-DK) (BGOUF) , and wireless speaker system provider Sonos (SONO) . There seems to be a good mix of global names as well, with 17% of the fund in Korean companies, 12% in European names, and over 10% in Japanese companies. Overall, I like what I see here both in security selection and global diversification. The one thing I'm not crazy about is the inclusion of the "10% Global Market Share" language as it brings names into the portfolio like Amazon (AMZN) , Apple (AAPL) , and Alphabet (GOOG) , (GOOGL) , which, while most likely good investments on their own don't provide the kind of focus I like to see in a targeted portfolio like this.
The Solactive Clouty Tune Index is provided by index calculation agent Solactive and its methodology Guide describes a slightly more involved security selection process. Interestingly, the top-level description of the index states that the strategy looks to represent "securities from the Music and Entertainment Sectors from the Global Markets universe and those that exhibit a high correlation with the music consumption attitude from the United States Music Market." I'm not quite sure what that second part means but that might become clear as we move through the security selection process.
One big difference between these two indexes can be seen in the "market capitalization" and "average daily value traded" (ADV) criteria. TUNE is looking for names with at least $1 billion in market cap as opposed to MUSQ's $100 million threshold, and similarly, ADV thresholds are $15 million for TUNE as compared to $500,000 for MUSQ. In terms of sectors, both indexes seem like they should play in the same space, but TUNE includes the entirety of Global Telecom Providers, both Console and Mobile Game Software Providers, Book Stores, United States Video and Television Services, Movie Theaters, and a bunch of other movie and television production and distribution segments as well.
A little further into the document, you get to the section titled "Correlation Universe" where it is explained that correlation coefficients for all U.S. companies included in the base universe (the Solactive GBS Global Markets Large & Mid Cap USD Index) are run against the weekly historical returns of the index over the past 180 days. The names with the highest correlation to the index are selected until 25% of the index (10 names) is allocated to these highly correlated names. At least this explains why names like Pfizer (PFE) , Fair Issac Corp (FICO) , and Enphase Energy (ENPH) are in the portfolio. I guess I understand the goal but looking through the other names in the fund, the entire portfolio reads more like a general entertainment exposure vehicle than it does an industry-specific product. Indeed, of the 40 to 50 some-odd names in each fund, I found only five names in common which are Live Nation Entertainment (LYV) , SPOT, SIRI, Tencent Music Entertainment Group (TME) , and WMG.
Thank You Very Much -- Goodnight!
While I'm not in a position to make any investment decisions for anyone but myself, I will do two things. The first is to point you to the Music Industry whitepaper developed by EQM Indexes, which does a great job outlining the investment opportunity. The second is to state that if you decide that exposure to the global music industry is what your overall portfolio is missing, my take is that MUSQ is the fund that will do a better job providing that for you.
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