A little over five years ago, Roundhill launched its first ETF — focused on the then-narrow video game industry. Now Roundhill's upping its game.
The company's lineup has expanded to more than a dozen ETFs. It manages nearly $4 billion in assets. Roundhill Magnificent Seven is now the firm's largest fund. The ETF taps one of the market's best-performing segments and accounts for roughly half of the firm's assets.
Investors mostly knew Roundhill as a thematic ETF issuer as 2024 began. But it spent last year expanding its product lineup. It launched a number of new products, including a pair of crypto ETFs and several high-yield option income strategy ETFs. It also debuted a leveraged complement to its Magnificent Seven ETF.
Investor's Business Daily caught up with Roundhill Chief Executive Dave Mazza to get his take on the markets, the ETF space and where his company might be innovating next.
Catching Up With Roundhill
IBD: Give us a background on Roundhill and the ETFs you offer.
Dave Mazza: Founded in 2018, Roundhill Investments is an SEC-registered investment advisor focused on innovative exchange traded funds. Roundhill's suite of ETFs offers unique and differentiated exposures across thematic equity, options income and trading vehicles. Roundhill offers a depth of ETF knowledge and experience, as the team has collectively launched more than 100 ETFs, including several first-to-market products.
IBD: Make the case for diversification through thematic ETFs.
Mazza: As evident with the Magnificent Seven stocks in 2023 and 2024, thematic ETFs have the potential to provide both outperformance and diversification to investor portfolios. Like any investment, the theme's popularity and its performance have the potential to ebb and flow. However, we view this as normal. The Magnificent Seven experienced a healthy consolidation after peaking in July before breaking out to new all-time highs in November. More broadly, we believe that thematic ETFs that capture durable market drivers have the potential to add value to investor portfolios over the long term.
IBD: Where are we in the AI development cycle?
Mazza: In our opinion, the AI industry is in the midst of a considerable spending and investment cycle. The Magnificent Seven stocks have invested billions of dollars in various AI initiatives in 2024. And (they) stated on their respective earnings calls this year that AI spending will continue to ramp up in 2025.
While some investors may have concerns about ongoing spending, this is necessary for the industry to continue to mature rapidly. This investment will lead to more success stories of AI deployment, similar to when Walmart reported a fruitful implementation of large language models to boost its productivity and product catalog.
Roundhill Plays On Boom
IBD: Are megacaps where the biggest opportunities lie in AI or are you considering some of the smaller, emerging names as well?
Mazza: For now, the Magnificent Seven are significant players in the AI space. Their revenues and spending support this from a fundamental perspective. That being said, Nvidia, Alphabet, Microsoft and Meta Platforms are not guaranteed a spot in Roundhill Generative AI & Technology ETF's top four holdings in perpetuity.
The beauty and opportunity with investing in such a nascent industry such as AI is that there are countless opportunities for disruption and innovation. Our proprietary screen involves quantitative and fundamental screening in order to seek exposure to those smaller, emerging players within AI, like Coherent and Reddit. The industry deserves an active investment approach. It rapidly develops, and we believe exposure to those emerging names is critical to capitalizing on AI's potential.
IBD: You manage three funds that use zero days to expiration covered-call strategies. How should investors use these in their portfolios?
Mazza: We would argue that these should be viewed as equity products for investors seeking income with the potential for capital appreciation. There has been a surge of interest among investors that are interested in the potential not only for high distributions, but also for the distributions to take place on a weekly basis to fund their lifestyles.
With the volatility environment playing a factor in the distribution amounts from the funds, there is some variability that should be expected with this type of investment. Aside from the underlying equity long exposure, this is one of the big differences between a fixed-income product that can provide a more stable income stream.
Considering Crypto ETFs
IBD: You also offer bitcoin and ethereum covered-call strategies. Did Roundhill ever consider launching spot bitcoin or spot ethereum ETFs over the past year?
Mazza: We challenge ourselves to search for new opportunities in the market with untapped demand. We decided to focus on differentiated products and investment approaches within the cryptocurrency space as opposed to coming to market with another spot fund.
IBD: Your thematic ETF lineup includes funds targeting video games, sports betting, esports, the metaverse and cannabis. Do younger, more aggressive retail investors like these most?
Mazza: With any investment, it depends on the investor's investment objectives and risk tolerance. Certain themes will likely not be suitable for every investor. That being said, we think a case can be made that thematic investing could have a place within investor portfolios for those who are looking to demonstrate conviction by committing capital to the strategy.
In our view, conviction and views on the industries of video games, sports betting, esports, metaverse and cannabis is generation-agnostic and there is demand to express those views through investing.
Roundhill Adapting ETF Strategies
IBD: Where is the next big growth frontier for your company?
Mazza: We survey the market's current ETF offerings and then we put on our lab coats. We think about how we can improve on the current structure of ETFs in the market, including within our own fund suite. This involves a certain level of introspection.
The recent transition from monthly to weekly distributions for Bitcoin Covered Call Strategy ETF is an example of this. So far, that has been really well received by our shareholders and prospective investors.
We think there is still more work and innovation that can take place within the high-yield strategy suite.
IBD: What is the most underappreciated risk you see in the financial markets today?
Mazza: (The last) Fed meeting caught investors off-guard. While U.S. interest rates have been rallying off their lowest levels of the year since September, the move went mostly ignored given how well equities traded with the expectation that the Fed had more cuts in the barrel for 2025.
The market now has to grapple with the reset of what seemed likely an outsize expectation on the number of rate cuts. A durable push higher in interest rates could challenge financial markets.
What's Next For Roundhill ETFs
IBD: Any other final thoughts on the state of the global economy and financial markets?
Mazza: 2023 and 2024 have been a "winner takes all" environment. The Magnificent Seven surprised investors after a robust 2023 with incredible follow-through in 2024. We think this can continue into 2025 given their positive operating leverage. However, there are other market drivers in play.
Valuations are elevated for most metrics, and this hasn't mattered yet. We think the nervousness on lofty valuations has helped catalyze the proliferation of option income equity strategies as investors look to hedge this risk. If global interest rates follow U.S. rates higher, more discomfort could be in store for 2025.
