Hidden Gem ETFs

December 01, 2017

GraniteShares Gold Trust

Gold is fundamental. It has, for millennia, been the world’s agreed-upon store of value. More recently, it’s found a key role in diversifying portfolios, rising in times of crisis when everything else falls apart. But one important fact about gold is that it’s fungible. Gold is gold is gold. That’s why we were so excited when we saw bar, the graniteshares gold trust ETF—because it offered investors exposure to gold at half the price of its largest competitor, with extremely tight trading spreads. Gold exposure at half the cost is a no-brainer. And for now, a hidden gem.

Matt Hougan, CEO, Inside ETFs: What’s the idea behind BAR?
Will Rhind, Founder and CEO, GraniteShares: We looked around and felt the existing market for gold ETFs—the largest ETF category in commodities—hadn’t been disrupted from a price perspective the way equities and fixed income had been. It was behind the times.

You had legacy funds that had been around for 12 years charging a management fee that was out of step with the rest of the market. We thought there was an opportunity to create a low-cost gold ETF.

So how did you price BAR?
BAR is the lowest-cost gold ETF on the market. Its expense ratio is 20 basis points, or 0.20% per year. That’s half the fee charged by the largest gold ETF, the SPDR Gold Trust (GLD), which charges 0.40%. It’s also cheaper than the iShares Gold Trust (IAU), which charges 0.25% and is much more expensive to trade.

BAR also uses a different custodian and different vault than GLD or IAU, adding a diversification benefit for those with existing gold ETF holdings who are worried about single- vault risk. BAR’s gold is all allocated gold, meaning it’s assigned to BAR and not lent out to anybody. BAR is 100% physically backed, and the gold vault is audited twice a year, including one time on a random basis.

Aside from the impact of expenses, will the pattern of returns for BAR be identical to GLD and IAU?
It will actually be higher. All things equal, the way gold ETFs work is that you start on day 1 with a certain amount of gold per share; in our case, each share of BAR started as 1/10th of an ounce of gold. But that 1/10th of an ounce decays over time, because it’s what is used to pay the expenses of the fund.

The net result is that today, because it’s both newer and cheaper, BAR holds a higher amount of gold per share compared to both GLD and IAU, and so, BAR will track the price of gold better on a pure charting basis.

You mentioned single-vault risk and allocated gold; is security a legitimate concern for gold ETFs?
It really all comes down to transparency— or rather, the lack of transparency from the legacy funds. We’re trying to be as transparent as possible with the gold holdings in our fund. We’re even trying to get more people into the vault and potentially offer a semi-live video feed of the gold, so you can literally see which bars BAR owns.

Where is gold in the market cycle now?
Gold is roughly 30% off its all-time high, which is very unusual given that other major asset classes are at or near all-time highs. We’ve seen the price of gold increase this year off the back of the peak dollar trade, as we’ve started to see U.S. dollar weakness. A weakening dollar really helps the price of gold, and most experts expect that dollar weakness to continue.

In short, gold is well off its highs at a time when almost everything else is at the top, but it’s starting to trend up.

Where does gold fit in investors’ portfolios?
The most important thing for people to realize is that they need investments in their portfolios that are uncorrelated to equities and bonds. Gold benefits from a flight-to-quality element when equity and bond markets correct.

Since the financial crisis, we’ve seen a big run-up in risk assets—an almost unprecedented run-up—to the point where many portfolios are more heavily tilted toward risk than they should be. Gold is really the only major asset class that has both liquidity and countercorrelation to equity and fixed-income markets, so it’s a great hedge for portfolios against a market correction.

BAR is a new fund. Is it liquid?
ETF liquidity 101 dictates that an ETF is as liquid as its underlying, and the underlying for gold is very liquid. You see this in the spread of BAR, which trades tighter than IAU on most days, and nearly as tight as GLD. All three funds hold the exact same underlying and all three are very liquid. One thing that helps is that the exact same market-making firms that make markets in GLD and IAU also make markets in BAR. As a result, you see the same kind of pricing.

Specifically, we trade at spreads of 0.02-0.05%, on average. That’s cheaper than IAU, which trades at spreads of 0.08-0.10% on average, because it has a larger handle, and in line with GLD, which trades at spreads of 0.01-0.03%.

Compared to GLD, BAR costs essentially the same to trade and is way cheaper to own. Compared to IAU, BAR is way cheaper to trade and also cheaper to own. It’s a no-brainer.

If you had to sum up BAR in one sentence, what would you say?
The lowest-cost gold ETF, BAR none!

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