ETF Expert Corner

GraniteShares Founder Will Rhind Spotlights New, Low Cost Commodity ETFs

July 18th, 2017 by ETF Store Staff

Will Rhind, Founder & CEO of GraniteShares, spotlights two recently launched commodity ETFs, including the lowest cost, broad-based commodity ETF on the market.



Transcript

You can listen to our interview with Will Rhind by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I'm now very pleased to welcome to the program Will Rhind, Founder and CEO of GraniteShares. GraniteShares is a new entrant into the ETF market. They launched their first two ETFs back in May. Both of these are commodity ETFs, and as I mentioned earlier, Will has a very interesting background. He's a former Principal at iShares. He was previously the Head of ETF Securities in the US, and he was also CEO of the sponsor behind the world's largest commodity fund, the SPDR Gold Shares ETF. Will is joining us via phone today from New York. Will, our pleasure to have you on the program.

Will Rhind: Thank you, Nate. Good to be here. Good morning.

Nate Geraci: Will, since we haven't had you on the program before, I'd love to hear a little bit more about your background to begin here today. Perhaps how you became involved in ETFs and also the backstory on founding GraniteShares.

Will Rhind: Yeah, sure, though as you can probably tell from my accent, I'm not a native of the US. I'm actually from Scotland originally. I started my experience or career with ETFs in London, worked for a company called Barclays Global Investors, which then created basically the ETF. I was right there at the dawn of the ETF market and the ETF business in Europe, and joined a team called iShares, which at the time, no one perhaps now knows, but at the time it was just a product. The ETF was just a product that we built and marketed along with other products that Barclays Global Investors offered at the time. Then, because it became very successful, it turned into a business within a business that was branded iShares, and grew and became what everybody knows now. Barclays Global Investors really sort of built that market originally.

I was one of the people that was kind of originally involved with that in Europe, and so I've been doing ETFs for 16 years now. That was the early 2000s. I then wanted to move more to the entrepreneurial side, and got involved with a startup ETF issuer in Europe called ETF Securities, and was pretty instrumental in terms of building that business over the next sort of seven years. Then I found my way to the US, because I established a US business and established a platform or launched a number of funds here. Then most recently, I was the CEO of the World Gold Council, their asset management unit, which owns and manages GLD, the SPDR Gold Shares ETF, which a lot of you will be very familiar with, but that was the first commodity ETF that was actually launched in the US.

After that, I left last year, and I've been wanting to start my own business for a number of years, but was really just looking for the right opportunity to do that. I felt that that was last year, so I left and established GraniteShares, which is a new ETF issuer in the market. I was very fortunate that I went out to raise money, and for those of you that are not or less familiar with this side of the business, it's been very, very tough for ETF companies to raise venture capital or private equity money at a startup or a seed stage.

One of the reasons for that is because, as many of you know, the ETF market is very competitive, and there are a number of big players. The opportunities there, from kind of an outside perspective, look tough for a new company to get involved. But I was very fortunate. I managed to raise money from Bain Capital, which is a superb backer for the business and somebody that is intimately involved in financial services. They took the same view as me that we believe that where there's large sort of oligopolistic positions, like you have with the ETF industry, that's just a sort of ripe environment actually for competition and for new players to be introduced.

We launched GraniteShares with the idea of really reinventing the way that people get exposure to commodities and reinvent the commodity ETF, and we've done that by launching COMB and COMG, our two new ETFs. I think the key sort of benefits of those are the fact that they're low cost. COMB is the lowest cost broad commodity ETF currently available in the US, but I think just as important as the fees, we restructured that to make it a '40 Act, so just the same as your regular equity and fixed income, albeit under the active exemptive relief, and no K-1, which is a big benefit and something that commodity investors haven't really seen up until this point.

Jason Lank: Will, this is Jason Lank. Welcome to the show. I'm glad you mentioned the entrepreneurial aspect in having to raise capital. There was a really neat piece featuring you in the Wall Street Journal just in the last day or so. You speak to the subject of securing funding. I'm thinking to myself, if I'm approaching Bain Capital, I really don't have a business. All I have is a business plan. Talk us through convincing smart, smart people to give you a lot of money and partner with you.

Will Rhind: Yeah. I think I even sort of half-joked in the article, in the Journal, that really all they were investing in was a PowerPoint and a spreadsheet. That's really the truth of it, that when you're pitching for venture capital money, you don't have a business. We didn't have an operating company. When I first conceived the idea of GraniteShares, I had to plan for the eventuality that I'd just fund it myself or maybe with some friends and family money. Obviously, you set your expectation or you set your dreams at partnering with an established venture capital firm or private equity firm, and you go out and try and court that investor.

The process for me was kind of interesting, because I'd been involved in companies before that had private equity investment, so I knew the space a little bit. I had some contacts in that arena, and I knew how the process worked and what the investors were looking for, and how they liked things presented, and how the process worked. That was an advantage, but I must admit that really the way that I approached it was just to look at the partners that potentially could invest in a business like GraniteShares. When you're looking for venture capital funding, there's a list of people that you can call, and really you only need one person to say yes. Actually with Bain, I had interest from other VCs that wanted to invest in GraniteShares, but it was actually through a friend of a friend.

I met with one of the partners of Bain. We just hit it off on a personal level, and one of the things that really struck me about them, and what I think was different in terms of their pitch to me versus others, was they said, "The most important thing for us is the human capital element." I think that was interesting, because again, it speaks to this idea that they know there's no operating business. This is about backing a founder who has a vision for building a company. Their specific thing was, "We have to make sure that there's a human connection and that that side of the business works. Is this somebody we can work with? Is this somebody we trust? Is this somebody that we can use our shareholders' money to invest in and build a business, create value for everybody out there?" I think that was a key component for me, and something that certainly resonated amongst some of the other pitches which were probably more transactional.

Nate Geraci: Our guest today is Will Rhind, Founder and CEO of GraniteShares. Will, let's take a more detailed look at the two ETFs you launched. Again, those two ETFs are the Bloomberg Commodity Broad Strategy No K-1 ETF, ticker symbol COMB, and the S&P GSCI Commodity Broad Strategy No K-1 ETF, ticker symbol COMG. Walk us through what each of these ETFs is designed to do.

Will Rhind: Sure. Maybe take a step back for a second - so why launch two broad commodity ETFs at this time? I think that my thesis and vision for this was that I felt like commodity investing needed to be reinvented. Having a lot of experience in that space, as a lot of your listeners will know, the way that people have been able to get exposure to commodities up until this point, you have two kind of fund or structures and way to do that. One is a '33 Act partnership, and these partnerships, some of them are successful in terms of assets under management. However, they distribute K-1s to investors, and that can be problematic when it comes to filing taxes. A lot of advisers don't recommend funds with K-1s. A lot of investors don't like to receive them.

Then, in order to kind of get around the K-1 issue, a lot of banks stepped into the market and issued exchange-traded notes. Exchange-traded notes, ETNs, have exposure directly to the credit risk or the credit of the bank that's issuing it. After the financial crisis when the Lehman Brothers ETFs went bankrupt, that really kind of highlighted the issue to people, and a lot of investors won't buy ETNs.

What I did was I looked at frankly the mutual fund space, and looked at some of the big mutual fund companies that offered large '40 Act mutual fund commodities. I was sort of thinking, "Why can't we do this in an ETF form?" The reason was that the regulations at the time weren't pervasive enough for us to do that, weren't in a position where we could do it, but that changed just over a year ago. That really allowed companies like GraniteShares to come into the market and say, "Okay, now we can offer a '40 Act commodity fund that is under the active exemptive relief that provides exposure to, in our case, we took the two flagship benchmarks in the market, the S&P GSCI, formerly the Goldman Sachs Commodity Index as most of you will know, and then the Bloomberg Commodity Index, which was formerly the Dow Jones-AIG and that became the Dow Jones-UBS. Anyway, those are the two most popular commodity benchmarks, and we wanted to wrap those in this '40 Act wrapper, no K-1, and offer that at the cheapest, in terms of management fee, that we could in the market. That's a kind of big step forward in terms of how people get exposure to commodities.

Nate Geraci: Will, you mentioned the management fee. It is notable that both of the ETFs you launched charge some of the lowest expense ratios among broad-based commodity ETFs. As a matter of fact, ETF.com puts together something we like to cover on this program, the world's cheapest ETF portfolio. COMB now occupies the commodity sleeve in that portfolio with an expense ratio of .25%. Why has cost been such a focus for you?

Will Rhind: I think when you're starting a new company and you're looking to break into a very competitive market, you have to differentiate. I think that it's not enough just to differentiate now with a good idea. The way I think about differentiation and disruption and making an entrance into the market, I've got to build the best product I can. What that means is I have to compete in three different areas. I have to compete on price, because that's just the nature of the ETF market. It's very competitive. Investors, advisers, want lower cost products. There's the fiduciary rule. The DOL is driving people in that direction. That is a reality. We have to play in that space.

I've got to also build a fund or engineer a fund structure that's superior than others in the market, so it really can add value, something different, not just a “me too”. Lastly, I've got to think about an idea which no one else is doing. By combining those three things, that's what we've done with GraniteShares and COMB and COMG. That's why I think it's compelling. Fees are really important, and I wanted to make sure that we had the lowest cost broad commodity ETF out there, but I think it's not enough just to be low cost. You have to have a superior product as well.

Jason Lank: Will, we're discussing two broad-based commodity ETFs. From a high level for investors, could you do a little compare and contrast? Why might an investor choose one over the other?

Will Rhind: Thank you. That's a great question. The reason why we picked these two benchmarks to wrap our funds around is because they're the most popular benchmarks for commodity investors in terms of the global amount of assets under management benchmark. Why are they? Well, they do two fundamentally different things. If you take the S&P GSCI, the easiest way to think about the GSCI is it has 21 commodities in there, so all the major commodities, the most liquid, the most traded commodities in the world. It weights them by production. Now this is very similar to an equity world, you’re taking an equity index and saying weighting it by market capitalization, so the largest companies have the largest weightings.

For the commodities world in the GSCI, the largest or the most produced commodities have the largest weightings. Oil, for example, has the largest weighting in this index, and energy, the energy sector more broadly, has the largest weighting in the index, somewhere in the region of 55 to 60% of the index. The reason why people like the S&P GSCI is because, if you think about why fundamentally people invest in commodities, it's most likely for one of two reasons. Either it's to provide a hedge against inflation, or it's for pure diversification purposes. I like to think of the GSCI as being the index that people look to when they want to provide or protect a portfolio against inflation, because it has a dominant weighting towards energy. Historically, energy has been a good hedge against inflation.

The Bloomberg Commodity Index is more diversified from a discipline perspective. It has 20 commodities in there, and no one sector, so precious metals or industrial metals or agriculture or energy, can be more than 30% of the index. There's a disciplined level of diversification in there. What I think about when I think of the Bloomberg Commodity Index is that's your index or that's your go-to if you're thinking about commodities as a, "I want to put 5% of my portfolio in commodities, and I want a broad, diversified, disciplined approach," and for purer diversification purposes, that's the way I think about the Bloomberg Commodity Index. I think COMG for people that are particularly minded about inflation and COMB for people that are particularly minded about diversification.

Nate Geraci: We're visiting with Will Rhind, Founder and CEO of GraniteShares. Will, on that subject, you mentioned diversification and inflation protection. For a long-term, well-diversified investor, are those the primary reasons to own commodities in a portfolio? What role do commodities play in a long-term investor's portfolio?

Will Rhind: Yes. I believe that those are the two main reasons why people own commodities and look to add commodities into a diversified portfolio. Clearly, those are long-term, meaning strategic, reasons to own commodities. There are tactical reasons which are short-term and would be largely based on momentum - would probably be the main driver - but when we think about broad, diversified commodity exposure, we think about that in terms of providing two major benefits for a portfolio. One of those is to protect against inflation, and the other is portfolio diversification.

Nate Geraci: We have just a few minutes left here, before we let you go, can you just give us a 30,000 foot view of the commodities landscape? Over the past several years, it has been pretty tough sledding for commodities overall. What are some potential positive drivers moving forward?

Will Rhind: Great question. This is something that I thought a lot about when I was launching GraniteShares. Clearly, one of the major considerations other than the product itself, which we talked a little bit about, but why fundamentally would I launch two commodity ETFs at this time? Frankly, the reason for doing that was because I would rather be launching a business hopefully at the bottom of the cycle than the top. I think when you think about the equity landscape, I struggled to think about what fund I could offer that I could say to people with a straight face, "This is something you should invest in now." We've been now 10 years since the financial crisis, and the equity markets know nothing other than up or have gone up every single year since then. It's certainly at a kind of elevated level.

I think about commodities, and I think about the tough time or the sort of ferocious bear market that we've had over the last few years. When I look at the index levels, particularly on the GSCI and the Bloomberg Commodity Index, you have to go back to - for both of those indexes, it's slightly different - but you have to go back to the late '90s, '98, '99, before you get to a level that is similar to where we are today or at least the low of last year in 2016. The market has had two particular stress points over the last few years, and those have been the collapse of energy prices and the rise of the US dollar.

I think in terms of those of you that are looking for potential positives, that the dollar has been on a downward trend from the beginning of this year, and in terms of the supply and demand dynamics, a lot of these sectors have been through a lot of pain. The companies involved in these sectors have consolidated, have sold assets, have restructured debt, have hired and fired new management teams - and oil, although that is still kind of going on, I believe that a lot of the worst of the last few years is behind us.

What does the outlook hold, or what's the reason to be excited about commodities? One of those is the potential for inflation. We had a lot of interest in that last year, and we had the first double-digit run-up in commodity prices in terms of the broad index levels that we've seen for a number of years. Really, that was around the hope or expectation of inflation coming back into the economy. This is something that we haven't seen since 1980. For those of you that are sort of studiers of financial history, you have to go back to the late '70s for the last inflation-driven commodity boom. Obviously, 1980, the commodity boom ended with Paul Volcker coming into the Fed, raising interest rates, and killing inflation in the economy. Really we haven't seen that since, so we've had a long time, almost 30 years, without notable inflation, and certainly no secondary inflation-driven commodity boom.

I think that when we look at the equity market and the economy over the last 10 years and think about how potentially late we are in the cycle, and we think about the potential policies that are being talked about from this administration - in terms of tax cuts, in terms of trade or import tariffs, in terms of infrastructure spending - if we were to put some of these either fiscal stimuluses, if we'd put some of these into the economy at this particular time, one would think that that would be inflationary. Of course, that would be good for commodity prices. I think there are reasons to be optimistic, and certainly from a pure diversification perspective, what I always remind investors is that right now just think about reallocating some of that equity risk, some of that bond risk, and putting it in an unloved, undervalued asset class like commodities, because you just never know when the market will take a turn for the worse.

Nate Geraci: Will, tremendous discussion today. We certainly appreciate you joining us on the program, and we wish you all the best as you continue to grow GraniteShares. Thank you.

Will Rhind: Thank you so much for having me. It's been an absolute pleasure. Thank you.

Nate Geraci: That was Will Rhind, Founder and CEO of GraniteShares. If you would like to learn more about their two commodity ETFs, you can do so by visiting graniteshares.com.