ETF Expert Corner

Frank Holmes Spotlights U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU)

September 12th, 2017 by ETF Store Staff

Frank Holmes, CEO of U.S. Global, explains the mechanics behind the recently launched U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU).



Transcript

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

Nate Geraci: The ETF we're spotlighting this week is the US Global GO GOLD and Precious Metal Miners ETF, ticker symbol GOAU. Great ticker. This just launched back in June. Joining us via phone from San Antonio to discuss this ETF is Frank Holmes, CEO of US Global. Frank, great to have you back on the program.

Frank Holmes: It's great to share my insight on this space with your listeners.

Nate Geraci: Frank, let's jump right in here. Tell us about this ETF. How are holdings selected? How are they weighted? What's the overall investment goal?

Frank Holmes: We have lots of tacit knowledge and technical experience as the first no-load gold fund mutual fund in America. We won many awards in that active space. What we want to do here was to say, "How do we beat the GDXJ?”, which is a unique product, but for us is that it's only focused on market cap. What we found is by applying rules-based smart beta concepts and quant approach, we took a very different unique approach looking at this. We could outperform the GDJX over the past decade and, based on our regressional studies, 94% of the time the rolling 12 months. The biggest reason for that, there's two of them. One is the focus on royalty companies. The other one is looking at who has the best factors on a per share basis.

Nate Geraci: Frank, can you elaborate on the royalty companies? I'm guessing many of our listeners are familiar with miners, but not necessarily royalty companies. What exactly does that business model look like?

Frank Holmes: Royalty companies are specialized financiers for exploration, expanding production, and gold and silver mines. In exchange for royalty of the production, they will fund upfront cash. It's interesting because quite often they will turn around and have a 10 year payback, but the geological footprint they bought is good for 30 years. So their returns and capital start to explode after 10 years on these particular investments. They have a moat around their business because once they have a royalty on that property, it's forever. If the company finds more reserves, they never have to write a check, they just get a royalty off that production. So they get tremendous optionality upside. The other big thing that's really uniquely different is the revenue as one of our metrics we look at, is revenue per employee and that's called the efficiency ratio. When you look at Franco Nevada, which has a royalty on Newmont and Barrick operations in Nevada, the revenue per employee at Newmont is about $300,000, and for Barrick is about $400,000. It's a staggering number for Franco Nevada, it's $17 million. I mean, that's 17 times greater than what Goldman Sachs revenue is per employee. So there's three major royalty companies. They represent 30% of this particular ETF. They rebalance every quarter. Then the other holdings basically have to meet this beauty contest, which is half looking at who has the cheapest values and the other half is looking for momentum. Who has the strongest momentum on revenue for the last quarter over four quarters? For cash for the last quarter over four quarters? This is how we've been able to create a unique product in the gold equity space.

Nate Geraci: Frank, how many holdings are in this ETF?

Frank Holmes: There's 28.

Nate Geraci: Okay, now as you alluded to this is a "smart beta” ETF, it's not just weighting holdings by market cap. I think you've spoken a little to this, but why do you think that's a potentially better way to approach the precious metal mining space?

Frank Holmes: Because the gold mining companies, in particular, the constituents that make up the GDXJ, have had massive dilution in financing their operations. They've destroyed that value of reserves per share, production per share. So over the past four years, they've been issued shares at a rate of 27% a year so either the price of gold goes up 27% a year or their production increases 27% a year. Then if that stops, they're doing value destruction. The royalty companies are one of the best at protecting the value per share. Our other factor we look at is, who is really protective of that value per share metric? Over time, it really starts to show up in giving you superior performance, rather than just buying a stock because it's got production of gold or silver.

Nate Geraci: Our guest today is Frank Holmes, CEO of US Global. We're spotlighting the US Global GO GOLD and Precious Miners ETF, again, ticker symbol GOAU. Frank, you've mentioned GDXJ several times, that's the VanEck Vectors Junior Gold Miners ETF. As I'm sure you're aware, earlier this year that ETF ran into some capacity issues where there was so much new money flowing into the fund it was tripping over certain regulations regarding diversification and ownership issues and it had to deviate from its index. Is that a potential issue with GOAU?

Frank Holmes: No, it's not because we were really focused on, if you look at the structure, the portfolio, is those value metrics per share. Not just buying names. A lot of those companies that they ended up owning more than 20% were issuing shares at a rapid rate also. So they wouldn't even show up in our portfolio. We go down to $200 million market cap, but the average holding is about $800 million. So we also like these royalty companies because the royalty companies quite often are like a Good Housekeeping seal that they have a royalty on a junior mining company. We have found that those companies are usually, those junior mining companies, are better performers. So this is the way we try to look at the overall gold space. But what's really important for your listeners is that it shocks people when I say that gold has beaten the market so far this century. If you go back to the year 2000, gold has far outperformed, and so has bullion, the S&P 500. But it's much more volatile and we've always advocated a 10% weighting and rebalancing each quarter in this space because gold really moves with negative interest rates.

Jason Lank: Frank, this is Jason Lank. The name of the ETF, GO GOLD and Precious Metal Miners. Now, precious metals is a catchall, I'm assuming, for everything other than gold. Now, I would imagine gold drives the bus, so to speak, in terms of importance, but how meaningful are the other metals to the price movement of the miners in the ETF? Is that something considerable that investors should be worried about? The price of things other than gold? Or are these metals just a by-product of the gold mining process itself?

Frank Holmes: When we add the word precious minerals, etc. it allows the latitude, if platinum, palladium have come in over the past 30 years as being star performers and then they fade out. So it's a capacity and the royalty companies themselves, in particular Franco Nevada, have gone into platinum and palladium royalty business. It's not a key component to their overall movement, but these metals do have one common thread with gold and same with silver, is the inverse relationship to the dollar and what drives that dollar down or dollar up is real interest rates. So what would the government pay you to buy their five year government bond, the two year government bond? And every month it gets reset with a CPI number. So they're willing to pay me only 1% and inflation is running at 2%, I'm losing 1% over the next five years for simplicity. Any time that happens, gold goes through a big rally. The other precious minerals, like platinum and palladium, they will also rally but they can be more impacted by industrial factors such as catalytic converters or supply restrictions coming out of South Africa or Russia.

Nate Geraci: We're visiting with Frank Holmes, CEO of US Global. Frank can you just give us your quick macro view of the gold mining space and the overall gold market right now? What are some potential drivers here?

Frank Holmes: I think the biggest factor is the dollar. When we look back at gold, there's two ways to look at the gold world for us. That is that we look at as the fear trade and the love trade. The love trade has been very significant because it's the rising of GDP per capita and affectionately known as Chindia, China and India, southeast Asia and the Middle East. There's a cultural affinity that as the GDP per capita rises, to buy more gold. Their GDP per capita for the past 20 years has been growing, for the 17 years, much more rapidly than the G7 countries. So these E7 countries are experiencing this great growth and they just buy more gold. That season usually starts in the summer and ends in Chinese New Year. So we have the Indian wedding season, we have the India New Year, they want to have Christmas. It's a key component. The other big component is the fear trade. The fear trade is predominantly excessive printing of money and negative real interest rates, which we just commented on. So right now, what we're witnessing is a drive in real interest rates have gone negative again. That's been a catalyst for the dollar falling and gold rising.

Nate Geraci: Frank we have about two minutes left here, before we let you go I did want to ask you about bitcoin today. We spent some time discussing this earlier in the program. As you may know, bitcoin has been called digital gold - I'm just curious, do you have a view on bitcoin and do you see it as a threat to gold?

Frank Holmes: Well, I think the big thing when you look at the bitcoin is really look at the blockchain technology and the significance of blockchain technology. Then, at a macro level, the New York Stock Exchange and USAA, which is just a US military insurance company and investment management company just up the street from where I am, put a lot of money into an exchange in San Francisco almost two and a half years ago. Why? Because they see that you'll be able to trade currencies 24 hours a day and settle every hour. Basically, that will “Uberize” stock exchanges. So you're seeing that they're positioning themselves that they have to be in the know of how they're going to use this blockchain. So I think that's very significant. And Fidelity, that they themselves have their employees using bitcoin to pay for things. So, when I was doing this research I found out there's over 40 companies that will take bitcoins and they've been doing this for many years now, to buy and sell you products. So there is a sea change taking place and I believe that Ethereum is very significant. They're leaders and bitcoin is very significant. In fact, I made a substantial investment in a company called Hive, it's listed in Canada. It'll start trading next week I'm told, but we'll see how that unfolds with the regulatory process. But they've partnered with Genesis Mining who is the largest miner of coins in the world started by three people. Two of them are mathematicians and it's amazing to see that they have a million people using their cloud service and their proprietary technology and digital cards to process these coins. But they're doing about a half of a billion in revenue, it's remarkable. So we'll be able to go and buy. We're going to be buying plants in Iceland because you need cheap electricity to be a miner. Two cents a kilowatt hour. You have to have the best graphic cards and put them all together. So we'll be buying ... I'll be making my investment through this particular company, which will give me exposure and they mint new coins, Persian coins, which then can be sold into the market system. So I'm a big believer in the space.

Nate Geraci: Well Frank, with that we'll have to leave it there. Excellent spotlight today. We certainly wish you all the success with your new miners ETF. Thank you for joining us.

Frank Holmes: Thank you.

Nate Geraci: That was Frank Holmes, CEO of US Global. Again the ETF is the US Global GO GOLD and Precious Metal Miners ETF, ticker symbol GOAU. You can learn more about this ETF by vising usglobaletfs.com. That's usglobaletfs.com.