With Steve Hawkins, President & CEO of Horizons ETFs
Steve began his career in financial services in high school as a mail runner for a Bay Street brokerage firm. He attended the University of Toronto to study math and philosophy and his jobs during college included working on the trading floor. This started what would become a long, storied journey into the equity markets.
Horizons ETF is the fourth largest ETF provider in Canada and one of the most innovative offerings of ETF’s in the world, having many first of its kind offerings, including their latest, the first psychedelic stock ETF in the world.
You’ve got a variety of psychedelic companies which are publicly traded within your ETF. Could you talk a bit about the selection process?
When we decided that we were going to create an ETF on psychedelic stocks, we had to do a thorough deep dive into the industry. We had to look at all types of pharmaceutical companies, biotechnology companies and service providers to the psychedelics industry itself. Then we had to determine what we would say is a “universe of stocks” that could be eligible for this ETF. And once we broke down those universes of ETFs, we really had to determine the criteria that we would want to use on a quantitative basis to determine how many companies should be in the ETF to provide the diversification that we feel is necessary for an ETF to provide the typical type of ETF offerings. The one important piece about an ETF is it’s not putting all your eggs in one basket, it provides you a diversified exposure to an underlying sector or asset class. In this case we wanted to have a reasonably diversified basket which meant at least 15 companies in the portfolio. So it was based on quantitative analysis of the underlying universe of which we had probably 30–35 companies back in January when we launched the ETF and then we made cuts based on trading volume, liquidity, market cap and float market cap. There is also an element of Big Pharma in this ETF as well, but big pharma is capped. And the big pharma companies that are in there have to have drugs or therapies that are specific to using psychedelics themselves. So we have both Johnson and Johnson and ADVi in the portfolio, one has a ketamine based nasal spray, which is approved. And the other is in the drug trial processes of ketamine based therapy for mental illness as well.
So this is a mixture of very careful manual selection based on various sorts of fundamental criteria, but also numerical assessments of companies. And out of that combined kind of art and science, you’re able to create your first baskets of opportunities, which are in ETF.
Yeah, the very first stage is determining what qualifies as a psychedelics company or hat could impact the psychedelic industry itself. When we launched the world’s first marijuana ETF in 2017, there were investors that were unhappy with us, because one of the companies that we added into the portfolio was a company that created synthetic CBD. So it wasn’t growing marijuana, and they thought that was sort of anti marijuana itself. Here we have a company out of the UK, Compass, which has been developing synthetic psilocybin. But we still feel that, whether it’s synthetic or not, it’s still impactful from a psychedelic specific operation. And so that’s why a company like Compass itself is in the portfolio, even though it’s not growing mushrooms etc.., rather it’s creating a synthetic psilocybin, which in hopes will be able to be used very much like psilocybin, which is grown in dirt.
If we looked at the hypothetical example of any new psychedelics company being listed, I presume that they would go through the same procedure under which you constituted the first class ticket. So you would consider new companies as potential additions to them. But there’s no automatic inclusion in your index.
If there’s new names that have entered the psychedelics industry itself, or have become public or done reverse takeovers, or entered the capital markets have grown in size from where they previously were, when they didn’t qualify from a quantitative perspective. All of the companies in that universe are reassessed at that quarterly rebalance period of time. When we created this ETF, the underlying index and the ETF itself, we learned a lot from when we created the marijuana index and the marijuana ETF in 2017. Over the course of three years since we launched that ETF, that underlying index has had to change eight times, as the marijuana industry itself has significantly matured and capitalized itself. Here we have a very similar early early stage capital markets sector. One key feature which we have built into this index, and the fund is what’s called a “fast add rule”. So if there’s a new company, which let’s say has been private for a very long time and very active in the space, they didn’t enter the public market at any point in time previously, but they come to market, do a big IPO and have significant trading volume immediately, we have built a rule into the index to add that company quickly. So literally within two weeks of a company doing a new IPO, that company can get added to the index and the ETF. And we actually had two companies, which we added two weeks ago, which is less than six weeks from when we launched the ETF bond on June 25, that we had to implement that fast add rule for those two companies.
In terms of the target kind of buyer of an allocation and ETF, is it ordinary retail investors or sophisticated investors? How do you see the mix of people that will be joining the ETF?
So one of the reasons we launched this ETF is we had been monitoring stock boards and stock groups in the North American investor sector, and we hadn’t seen the hype, and the type of investor friendliness in the self directed channel for psychedelics since 2016 and the early days of the cannabis industry. And so this ETF itself is really targeted at the self directed investor channel, investors who don’t want to put all of their eggs in one basket buying one individual stock or two individual stocks. There’s a lot of end clients out there who have their money being managed by a retail advisors will be interested in the psychedelics industry itself, the retail advisor has no interest in doing the underlying research for individual psychedelics companies, so they turn to an ETF because we’ve done that work for them through the ETF. So it’s really directed at the self directed investor, as well as the retail advisors. Here in Canada, institutional investors generally want to do the research themselves.
So it’s really retail investors that want this sort of balanced exposure, much like a venture fund. It’s just that we invest at very different stages. So they’re looking for balance, de risking, and an easier way into the market than would otherwise be possible.
Yeah, the ETF is very liquid, and always provides a liquid in and out opportunity for the end investor. Whereas with venture funds, you can have some illiquid investments in there or all illiquid investments. You can have private companies, with the ETF itself, we very rarely will have illiquid investments in there, because we want to keep a basket that market makers and liquidity providers can actively trade and hedge against units of the ETF themselves, which creates a very efficient marketplace for an investor to buy or sell the ETF itself quickly.
And how does the proliferation of many listed companies affect you positively or negative? You are selecting a basket of a subset of that total number. Does that overall number of listed companies have any effect on your operations?
I mean, it really depends on the growth of the underlying industry, the growth of the fund itself, as new investors come in. More names, more lines in the sector that qualify for the index, and the fund, ultimately does make our job a little bit easier and provides more diversification for the end investor. When we launched the ETF, we had $5 million, and a basket of 17 names, and some of the names were not that easy to invest in, even with a $5 million basket. Now we have over $60 million of capital invested into the underlying names. But now we have almost 20 lines, and expect with this upcoming rebalancing in March, there will probably be three or four potential new names that will also get added to the index. Really the more names right now, we believe provides more stability, more diversification to the underlying sector. And so we’re very happy to have more names.
And what are you seeing in your crystal ball in terms of development of this specific market? You’ve obviously got cannabis experience, you’ve been exposed to other disruptive industries, what do you think might happen in terms of general patterns over the next a year or so?
The industry itself is still very early, a lot of the companies themselves are developing their molecules and some are in drug phase testing. I think there’s going to be a lot of advancement itself in the approval processes, I don’t think any drugs are necessarily going to get approved into the marketplace in the next year. But I think there’s going to be a lot of advancement with FDA and Health Canada, with respect to phase two, phase three testing processes, and getting closer to ultimate drug approvals. Hopefully we can have a drug that can be prescribed by a physician or psychotherapist to an end client, and ultimately we expect these many therapeutic advancements to continue to happen with respect to the underlying different types of psychedelic therapies itself. Another important part is the delivery mechanism. It’s not just the molecule itself and the approval of the molecule; it’s how those therapies are going to be delivered to the end patient. We don’t want microdosing of LSD or psilocybin to take four to six hours to complete a therapeutic session, we want them to be in there for an hour and deal with the underlying mental aspects, as well as the drug therapy pieces. So, lots of advancement with the drug therapy approvals with the FDA and Health Canada, but also with the underlying delivery mechanisms themselves.
How do you see the interaction between venture capital investors, ETF investors, public markets investors, how do they synergize in a market like this?
They’re both very important parts of the process for the development. The venture stage is behind finding the right IP, providing some early stage financial support and essentially getting these companies off the ground. I previously used to do a lot of biotech venture capital investing and it was a lot of fun, a lot of excitement. But the one thing that I understood very quickly from being involved in that industry is how capital intensive it was. It takes those early stage and venture investors, people that take the the risk for the bigger reward, because then once a company decides that they have something of substance, its coming to the capital markets with their business plan and their drug approval plans to get support from more investors in the cap in as a public company or doing an RTO. Then, go into the mainstream world where funds and ETFs will start doing the vesting themselves. So it really is a progression, but venture funds are really the genesis of the ideas, molecules and those companies themselves.
On the subject of geography, it’s a two part question. Is your index Canada specific? And do you see Canada maintaining its lead? Or do you see the rest of the world catching up and opportunities being distributed more broadly?
The index is based on North American listed companies themselves. For example, Compass itself is a UK company, but is listed on the stock exchange in North America. We have Compass as an investment and through ADRs. Most of the other companies are, Canadian or American, and primarily are listed in Canada. Canada really was a leader with cannabis companies itself and capital markets. And again, here we see that Canada is being a leader with psychedelics companies; at some stage, the rest of the world will catch up just like it has started to do with cannabis. There’s several cannabis companies, which then ultimately bypassed the Canadian stock markets and went directly to listing in the US. As the rules around those exchanges for, underlying legally approved drugs does, and more awareness is brought to this industry. I believe that we will see big board US exchange listings of psychedelics companies and we’ll see an evolution of those types of companies in many countries around the world. For us, this industry is about the federally approved drug therapies itself. This marketplace is not recreational, and we’re not looking at the recreational opportunity with these underlying companies. All but one company in our portfolio is focused solely on FDA and Health Canada drug approval processes of their underlying molecules themselves. So it’s a very small recreational market, we think the opportunity here is the ultimately approved drug therapies.
In terms of general market conditions, what would you say to new or retail investors that are worried about early volatility? Is this something that people need to have a long term view on? Or should they be watching things almost on a daily basis?
I think there are two types of investors that want to enter this space: short term opportunity investors who aren’t specifically interested in the psychedelics market itself and the long term therapeutic benefits. Those investors can use an ETF, the same way they can buy one of the individual stocks and take short term risk, and get in and get out. There is definitely some volatility, some of that’s caused by the stock market itself, and where we are from a global perspective, but a lot of it is because of the short term traders that are in the space. As a long term investor in this sector, I’m looking at it as it’s more of a buy and hold. I think there are going to be some great opportunities down the road, very similar to the cannabis industry. I believe that you’re going to if you invest in psychedelics, you’re going to make money. It’s really how quickly and how much you want to make. One of the reasons why we created the ETF is, as much as I know about the underlying individual companies themselves. I look at the long term aspects of the sector generally. And so I’m a long term investor now in psychedelics, and I’m looking for a diversified vehicle to give me exposure to the sector like the ETF.
Yes, I think that the real growth is going to come in the mid to long term. There might be volatility in the short term, there might be a correction of what has been a very frothy public markets, but ultimately, the sector will grow very dramatically, and the leading companies will grow alongside and you’ll see growth maximize several years down the line. If people want to trade your ETF, how do they go about it?
They have to find a brokerage firm that can trade in underlying Canadian listed equities or ETFs. PSYK ticker symbol for the ETF, it is listed on the Neo Stock Exchange in Canada, and the only real participants that can buy and sell that ETF are investment dealers that have a license to trade in Canada themselves. But there are a lot of international banks, and securities dealers that have offices outside of Canada who can trade in those underlying Canadian equities themselves. So if there is an investor that is not in Canada, and has a securities brokerage account with a dealer that has an international presence in Canada, they have the possibility of being able to buy shares of the ETF.