In this episode of Industry Focus: Consumer Goods, Emily Flippen chats with Andrew Chanin, the co-founder and CEO of ProcureAM, the issuer behind the world's first pure-play space ETF. They take a deep dive into the space industry and how it has changed since its commercialization. Learn about the opportunities it presents now and in the future, the cost savings, how space technologies are helping to develop technologies back on Earth, and much more.
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This video was recorded on May 5, 2020.
Emily Flippen: It's Tuesday, May 5th, and I'm your host, Emily Flippen. For this Consumer Goods focused episode, we're actually blasting off into outer space to cover one of the newer, but rapidly expanding industries that, in my opinion, has the potential to disrupt what it means to be a consumer discretionary company.
Joining me today to break down the ins-and-outs of investing in the global space economy is Andrew Chanin, the Co-Founder and CEO of ProcureAM, the issuer behind the world's first pure-play space ETF, trading under ticker UFO. Andrew, thank you so much for joining me today.
Andrew Chanin: I'm thrilled to be here; thanks for having me.
Flippen: And I should clarify for our listeners. We're actually recording this on 28th, but it's going to be releasing on May 5th, and I hope that it'll be just as relevant a week from now as it is today, but I am personally really excited about the opportunity for space, that was part of the reason why I was so excited to have you on today.
So, I'd love to know just a little bit about yourself, what made you and your company interested in the opportunities for "space?"
Chanin: So, I had the fortune of, right out of university, actually getting a job with one of the largest ETF specialist trading firms on the floor of the American stock exchange back in 2007, and it provided me with a tremendous experience starting off with the trading and market making of exchange traded products, predominantly in the global equity and international equity world. And it led me down a path where I've created several ETF companies.
And most recently with ETF industry veteran and legend, Bob Tull, we created a company called ProcureAM. And everyone is always asking me anytime I create a new ETF, what's next? What's next? And for me, this was an idea that I was very excited about creating a publicly traded vehicle for people interested in getting diversified exposure to the space industry.
Having also drink in the ETF Kool-Aid and thinking that the ETF is a really interesting wrapper in the way that it opens up investment opportunities for, both, retail and institutional investors, we finally, kind of, approached this time-period when space was really an investable industry with enough companies from around the world, large enough market caps and true diversification differentiation across what these different companies do, that it seemed like the time was overdue for a space ETF. And we were thrilled to launch UFO a little bit over a year ago.
Flippen: I couldn't agree more. And you did, kind of, mention when the ETF was there as a rapper. But for our listeners who may know what an ETF is, but not know what an ETF is. What is the ETF and what makes it different than, say, a mutual fund?
Chanin: And ETF can take many different forms. In the earliest days they were very similar to the exposures that they'd offer you, like a mutual fund. Except unlike a mutual fund, ETFs have intraday liquidity meaning that they're actually listed on an exchange, and you can even buy and possibly sell your ETF almost instantaneously whereas with the mutual fund, you can only put in your purchase and sell orders once-a-day and that trade happens at the actual closing price.
So, ETFs created this way for investors to get all different types of exposure, and it all depends on the fund, at a relatively potentially low cost and potentially tax efficient vehicle. So, in my mind, they've always kind of been to me, mutual funds 2.0s. And ETFs in the early days were, kind of, mimicking exposures that you could get to broad-based index funds and then they started getting even more interesting getting into different asset classes, like, fixed income and commodities and it really allowed retail investors to get exposure to asset classes that institutional investors and money managers were pretty much the only players able to get those exposures. And so, it's kind of democratized how investors can get exposure to all different types of funds, asset classes based on geographical locations and what not.
So, a really interesting and growing vehicle and one that we're seeing start to spread all around the world with trillions of dollars invested into ETFs, both, domestically and globally.
Flippen: And you and your company have a great history in launching these ETFs, especially those with catchy names, like your cybersecurity ETF HACK, but surely these ETFs are more than just a fun name. So, tell us about UFO, what is it, what makes it unique and what's its methodology?
Chanin: So, UFO is an ETF listed on the Nasdaq, it was launched back in April of 2019. It's a fund that currently holds roughly 29 publicly traded companies from around the world specializing in all different areas of the space economy. It's also a pure play ETF, meaning that at least 80% of the fund, its holdings, are deriving at least 50% or more of their revenue from space-related activities or businesses. So, people that want to get exposure to space can buy one share of UFO and essentially, you're getting exposure to currently 29 publicly traded companies from around the world doing all different types of things space related.
So, the current types of companies that you could be getting in are companies that are in the communication services, industrials, information technology, consumer discretionary materials. But one of the important things is a lot of, kind of, space activities that people are familiar with come from aerospace and defense companies, but to us, it was very important to come out with a pure play weighted fund. So, you still do get exposure to some of the diversified aerospace and defense players that are very large players in the space industry, but because they are so diversified and receive, in many cases, less than 50% of their revenues from space, they actually fall into this 20% or less tranche that allows for these more diversified companies into it. So, predominantly you're getting these pure play names, but you also do get some diversified exposure to these diversified aerospace and defense companies.
Flippen: I like that clarification, because I know when I think about space investing, both, as a retail investor and as somebody who has researched the area, I mean, I had this preconceived notion that it's all defense and material companies, that there's really no -- you said "pure play" I mean that's a good word -- there's really no pure play space companies. So, it's great to know that with UFO you're getting more than just -- you know, there might be some defense, obviously, that's a big part of the industry right now, but you're getting more than just what people might have as a preconceived notion for space plays.
Chanin: Yeah, and, you know, I think that was very important, because I've seen it time and time again where someone will just launch a new ETF with a catchy name or on a catchy theme, but when you actually look at the holdings, you're not getting what you'd expect, and you might be in a company that is active in a certain industry, but it makes up 1% of the revenue. So, at the end of the day you're saying, why am I allocating to this fund to get this theme, when I'm really not getting that exposure I was hoping for.
And at the same time, we wanted to create something that was different. So, if we completely over-weighted this fund with companies that are in the aerospace and defense industry, someone would say, "Why don't I just invest in an aerospace and defense fund?" So, we didn't want to create an aerospace and defense fund, we want to create something truly unique and different, providing new exposures for investors that actually do want to invest in the space industry. So, that was something that was really important.
And asked, how is this different from other things that are out there? This was an idea I've been interested in for a while, but we actually were approached by a former Director of the Space Foundation, who had actually been building out a space-related index for several years as a project over there and that was actually given the opportunity to go on his own. He then partnered with another company that was a specialist in creating thematic indexes predominately used for exchange-traded funds and helped provide some of the expertise on, OK, what you need to do to an index to make it actually licensable for an ETF to track? And so, when we actually met Micah, a former Director of the Space Foundation and got to kick the tires on the index and work on a whole bunch of stuff to really make it ready for an ETF. We felt that we had the confidence and working with an expert and someone that truly understood the industry. And we gained a lot of confidence from him and his ability to educate and to back up different reasons for why certain names were included and others were excluded. So, for us that was a real differentiator.
And the index actually, since the fund had launched, has actually received, from the Space Foundation, a recognition, a designation as being the world's first certified space data product. So, we're really excited to be the first ETF to license an index that has received that designation.
Flippen: I love that and it certainly is an exciting long-term opportunity. And I'm sure you get this question constantly, so I apologize for asking it. [laughs] But it is an important question, I mean, why should the average investor be excited about the opportunity to invest in space right now?
Chanin: Space has been an industry for many years; however, it has changed dramatically from the early days of the space program. In the early days of the space program, it was almost like a vanity project, you know, it was, OK, which country can do X, Y or Z first, and it was, send someone into space and orbit the Earth and land someone on the moon. And it was tough to see how much benefit we got from that. However, since those times, space has opened for business. And where governments and government agencies, such as NASA and the likes, represented almost 100% of the spending on the space industry, back in the early days, they now represent closer to only 20%. So, there's this interesting support still from government-to-government agencies, but the commercialization of space has transformed the industry completely. So, we're looking at very different times, different space policy has allowed for new entrants.
And just a year or so ago, NASA came out with a big announcement, an event at the Nasdaq saying that the international space station is now open for business. And I think what that really symbolized was NASA showing the public that NASA doesn't need to be the creator, the owner, the operator, developer of every single technology, NASA has its goals and its missions and now they are extremely happy to partner with third parties, private and public companies, that can actually build out the technologies that they need in order for them to achieve their goals. And seeing, kind of, that collaboration and camaraderie around the space industry has made this, in my mind, one of the most importantly collaborative industries around the world. And these government agencies that have these ambitious goals are showing, "Hey, we're here, we have money and we are at the plate ready to partner with other companies that can help us achieve our goals." I think that was a big change.
But then, beyond just policy and government spendings and initiatives, we're also seeing technological breakthroughs. So, two things that come to mind are, first, reusable rockets. So, if you can envision flying in a plane from the U.S. to the U.K. and then landing and then just scrapping the plane when you're done with it. And then when you return, having to build a new plane and come right back, that's basically what the space industry has done for decades. So now, with reusable rockets, these rockets can accomplish a mission and then be refurbished and sent right back up in space to go about it again, as opposed to starting from scratch each time. So, there's more speed as well as cost savings. And so that's one factor.
And then another factor is increased technology from satellites and what their capabilities are. So, satellites are now smaller, they are lighter, sensors are stronger, the technologies and components can make them last longer. So now, you can actually send things into space and it's typically priced based on weight. So now, if you could send more powerful satellites into orbit that are longer-lasting and lighter weight, it lowers your barriers to entry significantly.
So, these are two major technological changes that we're seeing that's kind of enabling the growth of the space industry. But then also, space has so much varying interpretations for what space is. Like you said originally, you thought that maybe this would be heavily materials and aerospace and defense, but most people don't realize, space actually affects our everyday lives already. So, if you use your Uber. Uber is using GPS technology. So, GPS technology is a space-based system and service. So, you know, different things like GPS, how clocks work for financial markets and timing, there are so many different aspects that affect our everyday lives, even if you don't necessarily realize it.
And there are these major transformational technologies that are being developed that we're using on earth that are actually being powered by space technologies as well. So, a couple of these are cloud computing, internet of things and connected devices, blockchain, even 5G. And what we're noticing is, each of these industries are essentially reliant and enabled by the creation of immense amounts of data, and that data is either created or it's being processed for those technologies, but in all cases, it's being sent from point A. to point B. And so, if people believe that we're on the verge of a major break out in the amount of data that the world is going to be revolving around, and that that data needs to be sent from A. to N., one of the missing links in this is space. So, if all that data is going to be created and be sent, satellites will very likely be part of that chain. So, we're viewing space as this digital toll operator for the digital data superhighway.
Flippen: Wow! Those are some very real and very exciting tailwinds. When you think about the industry, do you see anything acting as a headwind, maybe concerns that you have or anything that's working against the industry right now?
Chanin: Yeah, looking at volatility of general markets, you know, although UFO might not be extremely correlated specifically with any one other index out there, when you see major changes going on in volatility, sometimes the baby is thrown out with the bathwater, and, you know, things do become more correlated. That said, what we've been really impressed by is how governments have actually continued to push forward on their various space initiatives. So, where some might say, "Okay, well, now the coronavirus is something that's distracting people, we're going to have to take some of that budget away and some of that spending away and put our goals and initiatives on the backburner until we figure out how to cure coronavirus," we're actually seeing the opposite. We're seeing the government saying, "No, we're still going full speed ahead." Maybe we have to delay a launch or two, but they're still moving forward. And that's happening on both the military and defense side as well as agencies like NASA moving forward with their projects. So, the spending and government support is actually still there.
And then you look at things like the Space Force. Well, just because there's a virus going on, it doesn't mean that you can let down your guard. And we've noticed since coronavirus has stricken the U.S. as well as the world, we've actually pushed forward with the Space Force. And we have now been building and deploying satellite jamming defense capabilities for the Space Force. And we also saw just a couple of weeks ago, President Trump announce a new space order which is actually giving the allowance for U.S. companies and civilians to actually find ways of extracting resources from outer space, be it the moon, asteroids or beyond. So, we might not necessarily be at the point yet to capitalize on resource extraction. However, it shows how this is still a very front of mind topic for those leaders around the world.
And the U.S. doesn't operate in a vacuum, typically when the U.S. military is doing something, countries like China and Russia and others say, "You know what, we need to stay competitive as well." And it also causes them to increase their spending on these different defense areas. And now that the Space Force has actually become a new frontier for the U.S. military, that's something that may also trigger foreign governments, both, allies and adversaries, to increase what they're doing to build out their space-related infrastructure and capabilities.
Flippen: Is there any real timeline for these developments though? I mean, you are presuming that these would be long-term initiatives that would take upwards of decades to really see the impact. So, what makes UFO an exciting opportunity today versus five years from now?
Chanin: Well, if you just look at the holdings currently in the portfolio, a lot of these companies are already cash flow positive companies today. So, how space is currently affecting us today and how we're utilizing space, predominantly comes from the communications side. So, we're having this conversation right now and very likely satellites are helping in this process of this podcast actually being able to record this podcast now as well as for it to be disseminated to the many, many listeners around the world that tune into your podcast. So, your communications are still very important.
With work-from-home and things like that, it's putting different stresses on broadband. If businesses completely continue to slow down and there are layoffs and things like that, there could be more broadband capacity which could impact revenues. But many of these companies are already big players that are generating revenues as we speak. So, I think a lot of the things that people get very excited about are these very far off ideas like colonizing Mars and going beyond our solar system. Those ambitious goals and technologies are being worked on today to help us achieve those, but there are many closer near-term goals, like, even building permanent colonies on the moon is probably a lot closer than we had imagined. And some of the technologies that we develop there might actually be things that we're able to bring back here and implement on Earth.
Just one of those ideas is agriculture. So, you go to these very remote places where you don't have infrastructure, you don't have the typical resource that you need, but if you're trying to build a permanent colony there, you're going to need to figure out how to feed those populations. And if we can figure out how to grow plants on the moon and feed colonies and people there, there's a good chance that we're able to use those same technologies and go to remote places on our planet and help feed those where typically they may have been unable to produce agriculture.
So, I think there's a lot of things that are already happening today, there are things that are being worked on specifically for space-related missions that we'll actually be able to take back on to Earth and use it back here as well.
So, I think that an ETFs being that, you know, it may be a longer-term theme, because we're just scratching the surface on what this industry could potentially look like in the future. Being in an ETF gives people the diversification to have the exposure to many different companies specializing in different areas. And it's not just, you buy it today and all of the holdings are the same and stays that way forever, and hopefully they all work out.
The index provider is constantly looking at the universe of space companies. Just toward the end of last year, Virgin Galactic became available for investors to get exposure to, and that was a company that was private just a year ago. So, you look at things like that, and that company is now one of the larger holdings in UFO. As other companies become public or they spin off their non-space assets or they purchase more space assets, these are all things that could be considered for this fund.
So, it's a living, breathing fund that people can buy when they're ready to buy it. And it's constantly, every quarter it's rebalancing, every six months it's reconstituting. So, there are opportunities for people to get exposure to the space industry today by investing in the fund. But also, as the industry itself changes and evolves, there's also the potential for new companies to be added to the fund.
Flippen: I'm so happy that you mentioned Virgin Galactic, because I think if we didn't talk about it, I'd have countless [laughs] emails in my inbox afterwards. I have to admit, Virgin Galactic is my guilty pleasure stock. I bought myself some a couple of months ago. While there's very little fundamentals, it is the only publicly traded space tourism play in the market right now. So, I do have one last question for you, which kind of relates back to why we're talking about this for today's Consumer Goods focused episode, really consumer discretionary, to be more broad. [laughs]
How do you think about the opportunities in space for consumers, and how do you think about it in terms of playing upon long-term consumer discretionary demand?
Chanin: Phenomenal question. And there are so many ways that the space industry can go and grow in the future, you mentioned Virgin Galactic which is the first pure play space tourism company. And I think that's just really kind of opening people's eyes to how space could become more attainable for people on this planet. And if they can get the technologies right and they can continue not far off from their timelines for sending Sir Richard Branson into space, and then many customers from around the world.
You know, you talk to astronauts, and one of the things that they always say is, going up into outer space and looking back at our tiny blue planet completely changes their perspective on things and reminds them of how small the world really is and how we must treat our planet right. And the more people that we can send into outer space to get this perspective, makes you wonder how we might change as a civilization on Earth. The more people that see it -- especially these first people that are going to be going or scheduled to go on the Virgin Galactic flights, you know, these are some of the wealthiest people on the planet and they have the ability to put their money to work to do different things that they believe in.
And so, I think some of these first people to go up there could be maybe are already innovators in the space industry, but could come up with entire new ways of how to develop products and also how to make us work better together as a planet, as only having the Earth as our only option at the moment. Maybe it's another thing, like, we look at coronavirus and geopolitical tensions, as well as pollution and environmental concerns, and all of these things are things that are being discussed by the space community today. So, hopefully we can create a cleaner planet for everyone, and that will affect how we all live.
But when it comes down to individual products and things like that, we mentioned agriculture, and that's, we might be creating things for use in space but many times, we're actually creating things that are then actually usable on Earth. So, healthcare is another one of these industries that's looking to space to help do R&D for new drugs and treatments.
It would be very unlikely that the current population on this Earth that even 5% have the opportunity to go into outer space in our lifetimes, but that could be a big change going forward. And so, I think the amount of products that can be developed that are space-related that then come to affect us, typically has been cost-prohibitive, especially on the R&D front, however, with these different technological trends occurring that are making space more accessible and more affordable, can allow more companies to actually create more products.
So, I don't know if we'll see 20 Virgin Galactics, maybe we only need two space tourism companies in the near future with different types of products that are either purely from technologies developed from different space trials. I would be shocked if we don't receive more useful technologies on this planet. It seems like a lot of them are technologically driven, like things like Uber and Google Maps [Alphabet] and we're also seeing a bunch of imagery from satellites as well that hedge funds are using. But I think space will affect us continuously from ways that we don't see and don't understand. But I think that, because the cost of getting to space is significantly lower, that we could see a whole new wave of consumer products. Right now, it's mainly stuff that's being delivered to us from one place on Earth to a satellite and then back down to us. So, that might change where we start to see more physical products but right now, communications has been a very big driver. And on the broadband internet space as well, that seems to be an area of strong demand.
Flippen: Well, I'll tell you what, Andrew, that's not only a lot of information to take in, I'll tell you what, it makes me excited about the entire -- I call it the global space economy, because I don't want to call it just space, because to your point, I think that there's so much more to this industry than what people may think.
I really appreciate you taking your time and walking us through, both, how you view space and investing in it as well as UFO.
Chanin: Well, thank you. And I'm happy to come back on anytime you'd like to talk about space again in the future.
Flippen: [laughs] I'm sure we will. Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to say "Hey!" you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the screen today. For Andrew Chanin, I'm Emily Flippen, thanks for listening and Fool on!
