“Choice of investment approaches is a win for investors. An increasing variety of ETFs is a win for investors. Buy what you understand, buy what you believe in, buy what helps you achieve your goals, and don’t let the scolds tell you that your choices need be restricted to vanilla, strawberry and chocolate.” – Phil Bak – Exponential ETFs
I love the above quote because it represents a refreshing, entrepreneurial attitude toward the ETF industry. Readers already know I love seeing innovation in the ETF space. A space that is dominated by 3 (or 4) ETF providers depending on how you where you want to put the cut-off.
That was why I was excited to speak with William Rhind, founder and CEO of startup ETF provider GraniteShares. GraniteShares has to-date launched 3 ETFs and is backed by venture capital investors including Bain Capital Ventures. This is not Will’s first go-round in the ETF business having spent a number of years at iShares.
GraniteShares has to-date launched three ETFs in the commodities space. This includes:
Below you can find my questions in bold. Will’s (unedited) answers follow. Enjoy!
AR: There are few bigger fans than me of ETFs, see Keep ETFs Weird. That being said, I am not sure I would be willing to fund a new ETF provider taking on dozens of established competitors, four of which have $100 billion or more in AUM. What gives?
WR: In my mind this is a glass half full question. The majority of the ETF market is essentially controlled by an oligopoly of 3 or 4 players. In business, you can take the view that if a market or industry its controlled by an oligopoly there is no way you can compete. You can also take the view that a large market with only 3 or 4 large competitors, is a huge opportunity! Not only is the ETF market a huge opportunity, in our view, its getting smaller all the time as more consolidation takes place and larger players snap up smaller ones (Invesco – Source, Invesco – Guggenheim, WisdomTree – ETF Securities some recent examples).
Whenever a firm takes on venture capital, there is an implicit agreement with investors that the business has the potential to scale and grow. What is the strategic pitch for GraniteShares in the increasingly-crowded ETF space?
Following on from what we just discussed, this is a market that is growing in terms of size or investor adoption but shrinking in terms of ETF issuers. Flows into ETFs are a super macro trend that is only going to accelerate over the next 10 years. There is a huge wall of money moving out of actively managed mutual funds into lower cost ETFs and GraniteShares is part of that. Our investor proposition is really simple; we have the lowest cost commodity ETF offering in the market with no K-1s. We are using our expertise and experience within the commodity markets to be an center of excellence for investors.
AR: Given your experience in the ETF business, what do the established players get right about ETFs and where have they gone wrong? Or said another way, how does a small startup like GraniteShares plan to get things right?
WR: I think what they got right was that they were early. Because of that there is a lot of concentration of assets among the top 3 players. That creates opportunity for firms like GraniteShares as we’ve reached a point where investors and their compliance or risk management teams are starting to realize they have too much exposure to these firms in their portfolios and are looking for ways to diversify. What GraniteShares is trying to do is create value for investors by offering differentiated products at a low cost. We specialize in commodities so we bring a level of expertise that others don’t have. Whether you’re investing in commodities for the first time or you have very specific questions on the sector, we can help you implement the right solution.
AR: Speaking of the business, what is the minimum amount of assets a new ETF need to become viable? Is there such a thing as a loss-leader in the ETF business?
WR: Viability is a function of the management fee you charge and the level of assets you manage. As a general rule of thumb, ETFs should be profitable at around $50 million.
Commodities, as a whole, have been in disfavor for years now. Why choose commodity ETFs as your lead products? Why not pick one index GSCI or Bloomberg and run with it?
GraniteShares is an authority on commodity markets so it’s natural for us to focus on this sector. We are now closing in on two back to back years of positive returns for commodities. We believe the bear market for commodities is behind us and the market is in a better place. Global growth is picking up, the U.S dollar appears to be on a downward trend and demand for commodities has been increasing. In terms of funds, we take a platform based approach and offer exposure to the most important commodities or benchmarks in the space. As such we don’t favor one fund over another, the only important thing to us is what is the best fund for the client.
Without giving away the store, what other strategies and/or asset classes does GraniteShares plan to address? Are they all index-based or is there a plan to expand into more active and/or tactical strategies?
We’re looking to provide access to strategies that we think help improve investment outcomes for our clients. That could be by offering funds at a lower price point to our competitors or it could be by offering something new or different that meets a specific need in the market.
AR: There are already a handful of physical gold ETFs, including one that is synonymous, with the sector. How is the GraniteShares Gold Trust different? If so, what other asset types could this approach be extended?
WR: GraniteShares Gold Trust, ticker NYSE: BAR is the lowest cost physical gold ETF in the market. We charge 20bps for gold which is half the cost of some competing funds. Another way we differentiate is we use a different custodian to store the gold. All gold is held in a maximum security vault in London. The ETF does not lend out its gold or accept anything like cash or derivatives in lieu of gold. We can only accept physical gold in the form of London Bullion Market Association (LBMA) 400 Oz “good delivery” bars.
AR: There is a bit of a chicken-and-egg issue with new ETFs. Absent an institution seeding a fund, see SHE or XT, how do you maintain enough liquidity so as to make a new ETF a viable option for advisors, institutions etc.?
WR: This is something that is still not well understood by investors. Liquidity is not the same thing as fund size. Liquidity is how much you will pay to buy and sell the shares on exchange; the bid/offer spread. Are you able to buy or sell shares with minimal friction? The spread of the ETF therefore is a function of the liquidity of the underlying. Commodities are a very liquid underlying and you can see that reflected in the tight spreads on our funds.
AR: It seems that most of the major ETF providers are trying to move in-house their index construction and maintenance in order to avoid paying third-party providers. Is GraniteShares looking to work with index providers, bypass them altogether or some combination thereof?
WR: I think this was more prevalent a few years ago when certain index providers charged very high license fees to track their indices. There has been a race to zero on the index license side of the business too and as a result I feel we are at a place now where index license fees are reasonable enough where firms like ours see no real advantage in doing this ourselves.
AR: Thanks, Will. Good luck. I am looking forward to see what GraniteShares has coming down the pipeline.