N
ineteen hundred exchange-traded funds vie for attention on Wall Street. Is there room for yet more? Sure there is, says William Rhind, daredevil founder of the ETF vendor GraniteShares.
Rhind's operation, squeezed into a scrawny WeWork room in lower Manhattan, has a lineup that includes a cut-rate gold fund, two commodity funds and an unusual blend of high-payout securities aimed at dividend-hungry investors. If the Securities & Exchange Commission approves a pending application, GraniteShares will be one of the first in the controversial business of bitcoin funds.
GraniteShares' eight employees are taking on an industry dominated by BlackRock, Vanguard and State Street, each with ETF assets at least 1,000 times as great as GraniteShares'. That takes some gumption. Where did that come from?
Rhind, 39, is a native of Scotland, where capitalism hangs in the air. This is the birthplace of Adam Smith, of the 19th-century investment pools that were the forerunners of American mutual funds and of Forbes magazine founder B.C. Forbes. As a teenager Rhind was inspired by his best friend's dad, who as a young man took over a family fishing business in Aberdeen and decided to make something bigger out of it; that fellow, Ian Wood, is now a billionaire in the oil-service business.
In 2007 Rhind was ensconced in a safe job at the London office of iShares, then an arm of giant Barclays (and now part of giant BlackRock). Desiring something more adventurous, he left to join a money-losing operation called ETF Securities. It had only $300 million in its funds. He took a cut in pay but got a little equity.
GraniteShares' eight employees are taking on an industry dominated by BlackRock, Vanguard and State Street, each with ETF assets at least 1,000 times as great as GraniteShares'.
Risky? Not really, Rhind insists, given that the ETF business was growing fast and the vendors were starved for talent. If the new venture didn't work out, he could always land a job at another big investment firm. Indeed, a mere job switch was too tame for his taste; he increased his bet by investing some of his savings in additional shares in the business.
Assets at ETF Securities climbed 100-fold. But Graham Tuckwell, the founder of the firm, was slow to sell the company or take it public, so Rhind jumped ship again, this time to run the $29 billion SPDR Gold Shares ETF. A few years of catching his breath there left him anxious to play entrepreneur again, this time from the wheelhouse.
Rhind incorporated GraniteShares in 2016 and opened its first ETFs a year later. He got help from Bain Capital Ventures and some other investors, but managed to keep more than half the equity.
The first two products were diversified commodity pools: Bloomberg Commodity Broad Strategy No K-1 and S&P GSCI Commodity Broad Strategy No K-1. They both undercut the established players in commodity funds. Their expense ratios, respectively 0.25% and 0.35%, are less than half the fee on the $2.4 billion Invesco DB Commodity Index Tracking Fund.
Next item on the agenda was a gold bullion fund aimed at stealing traffic from Rhind's previous employer. The SPDR fund charges investors 0.4% a year, or $480 for someone seeking the equivalent of 100 ounces of gold. GraniteShares Gold Trust cuts that fee in half.
After a slow start, Rhind's firm caught on this spring and is up to a third of a billion dollars in assets. Profit? None as yet. He's running this business the way Jeff Bezos ran Amazon in its first five years: volume first, profit later. If he can get $1 billion under the roof by the end of next year, he says, he'll have an enterprise worth perhaps $100 million to an acquirer.
This is not going to be easy. The ETF industry's asset growth will sooner or later taper off, and the big players are clawing at each other with fee cuts. You can get a stock index ETF now for 0.03% a year. That kind of pricing would doom a $1 billion outfit.
Rhind's answer: "That's been happening for 25 years. And it's only a phenomenon in the most commoditized, heavily trafficked benchmarks. In fact, the market is segmented, with lots of different products and lots of different buying behavior."
Still, SPDR Gold, a joint venture of State Street and the mining industry, isn't about to let an upstart siphon away all the price-sensitive customers. While leaving in place the high price on its big fund, in June the sponsor opened SPDR Gold MiniShares Trust, with a fee of 0.18%, a hair below Rhind's 0.2%.
Rhind's running this business the way Jeff Bezos ran Amazon in its first five years: volume first, profit later.
Rhind says there's room for both of the cheap funds, since they serve slightly different clienteles. His fund, like the older SPDR fund, has shares pegged to the value of a tenth of a troy ounce of the metal. The SPDR Mini, like the iShares Gold Trust (expense: 0.25%), tracks a hundredth of an ounce and is attractive to small-stakes buyers. For an overnight speculation, the high liquidity of SPDR Gold makes it the cost winner. But for a one-year holding, Rhind's product is the best buy (see table) .
If inflation keeps getting worse, Rhind could do well with either gold or commodities. If it doesn't, he has other irons in the fire.
The prospective bitcoin ETF will face competition from other small firms but probably none from Vanguard. A trillion-dollar asset manager won't risk its reputation on something as volatile as cryptocurrencies, Rhind says: "It's the circle of life. A company gets big, and its priorities change. It's managing brands and managing risks."
GraniteShares' Hips U.S. High Income ETF has only $8 million but looks like something that will appeal to retirees. It's a mash-up of high-payout pipeline partnerships with real estate investment trusts and business development companies. The blend enables the fund to yield 6% while sidestepping a corporate tax that afflicts pure-pipeline ETFs. Vanguard has nothing like it.
As for Rhind's wild bet on the shares of ETF Securities: After years of hesitation, Tuckwell decided to sell the firm off in pieces for a combined price near $650 million. Rhind's undisclosed portion will probably turn into cash by the end of the year.
Rhind isn't saying what his plans are for the windfall, but it would be out of character for him to leave it safely in the bank. With more capital, GraniteShares could get to $1 billion or even $10 billion in assets all the faster. What did that fellow Brit Kipling say? "Make one heap of all your winnings and risk it on one turn of pitch-and-toss." That's what they do in Aberdeen.
Cover image by Jamel Toppin for Forbes.
