New ETF offers exposure to global music industry, but will advisors rock out?

A new exchange-traded fund offers investors exposure to the global music industry, but not every financial advisor is ready to rock out.

The music industry has surged thanks to the return of live events after Covid-19 lockdowns, while new monetization methods and the ability to ride global paid streaming offer attractive growth potential, according to MUSQ, the company behind the MUSQ Global Music Industry ETF. Goldman Sachs predicts predicts the global music industry will grow at a compound annual rate of 12% to reach $53.2 billion by 2030, according to data cited in the product’s white paper.  

The MUSQ ETF offers exposure to the entire music industry ecosystem, with 34.2% allocated toward streaming services and 35.3% to content and distribution. The ETF also invests in live events and ticketing, music equipment and technology, and satellite and broadcast radio.

Holdings are weighted with a maximum initial weight of 7%, and companies must have a minimum market capitalization of $100 million to be included in the index. MUSQ also has a liquidity requirement of $200,000 of trading volume per day, according to ETF.com.

The index includes 48 companies that either derive 50% of their revenue from music, are a top five player in the market or control a greater than 10% market share in streaming or content. Holdings include companies like Universal Music, Warner Music, Live Nation, Spotify and Sony Music.

The product is the brainchild of David Schulhof, the founder and CEO of MUSQ and a music industry veteran whose resume includes serving as president of music publishing at LiveOne, president of IM Global Music and president of music at AGC Studios. The product is meant for retail investors looking for exposure to the music industry and for advisors, family offices or institutional investors hoping to give clients diversified exposure, Schulhof said.

"What's unique about this is it's not correlated with markets because music is an indispensable part of life like food and water," Schulhof told InvestmentNews. "In good times, you're celebrating by listening to music, and in more unfortunate times, like Covid, you're at home and consuming content, like listening to music. It’s a unique asset class, it's not correlated, it’s a hedge against inflation and provides investors with a thematic exposure."

The new ETF could be a great addition to an already diversified portfolio for clients interested in expanding into a niche area without having to invest in a single company, said T.J. Faber, a financial advisor with Blackbridge Financial.

"They now have an easy exposure to another area in the market and this could lead the way for more sector-specific funds down the road," Faber said.

While sector funds make for attention-grabbing headlines that attract new investors, they aren’t generally a good way to make money in the stock market, said Jeremy Keil, a financial advisor with Keil Financial Partners, a registered investment advisor based in New Berlin, Wisconsin, that's part of Thrivent Advisor Network. Citing research from Thomas Jefferson University on the performance of sector mutual funds, Keil said clients are generally better served by index funds.

For one thing, sector funds are usually created after a certain sector, like the music industry, has become an attractive investment destination, Keil said.  

“Any time I talk to a place like Fidelity or a wholesaler and they are talking sector funds, it’s because the particular sector was already hot,” he said. “They somehow didn’t mention it a year earlier!”

The top three holdings of MUSQ are Amazon, Apple and Alphabet (Google’s parent company), according to the product’s prospectus. These also three of the top six holdings in the S&P 500 index fund IVV. But while an S&P 500 ETF can be had for close to 0% in fees, MUSQ has an expense ratio of 0.92% of average daily net assets.

The firm is waiving a portion of its management fee to bring total annual operating expenses to 0.78% through Aug. 31, 2024, but the fund is still expensive for something that shares a lot of investments with an S&P 500 index, Keil said.

“I think most, if not all, investors are better off with a broad index fund compared to sector funds,” he said.

The ETF's expenses are higher than benchmark funds because of costs associated with holding international companies, Schulhof said. More than half the companies in MUSQ are traded outside of the U.S., representing the exploding market in countries like Korea, Japan and India.

Large technology companies like Apple, Google and Amazon are also included because of the large presence they have in music streaming today, but they are limited to a 7% weight on the index.

"It’s a thoughtful approach that incorporates the names and the smaller players," Schulhof said. "[The ETF] gives access to the most promising aspects of the music industry that are hitting all the right notes."