The wave of next-generation commodity ETFs is continuing to build on Monday with the launch of two broad commodity funds from a new issuer. The GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) and the GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG) will both track well-known commodity benchmarks.
The two funds are listed on the NYSE Arca and come with some of the lowest expense ratios in their asset class. COMB charges 0.25%, while COMG charges 0.35%.
Interestingly, COMB undercuts the price of the recently launched ETFS Bloomberg All Commodity Strategy K-1 Free ETF (BCI), which tracks the same index and charges an expense ratio of 0.29%. By doing so, COMB lays claim to the mantle of cheapest broad commodity ETF. Three other exchange-traded products track the Bloomberg Commodity Index.
Similarly, COMG is the cheapest of the ETFs—out of a total of three—tied to the S&P GSCI by quite a margin; the closest is the iPath S&P GSCI Total Return Index ETN (GSP), which charges 0.75%.
“That was a very deliberate strategy, because as a new entrant to the ETF market, we have to do our best to build the best possible products to bring the most added value to investors,” said William Rhind, founder and CEO of GraniteShares.
He notes the firm’s product development strategies focus on offering low prices where appropriate, offering better structured products in areas where it can innovate and provide improved solutions, and on bringing new, first-of-their-kind products to the market.
“What we really wanted to do here was reignite or re-establish commodity investing in America,” Rhind added, pointing out that the firm chose to base products on two widely accepted commodity indexes with the idea of reinventing the way investors get exposure to commodities.
The Bloomberg Commodity Index covers 22 futures contracts representing 20 different commodities. Its components are weighted based on a combination of liquidity and production data and diversification requirements.
Meanwhile, the S&P GSCI covers 22 different commodities via 24 futures contracts and weights its components based on global production values relative to the importance of the respective physical commodities to the global economy.
Importance Of Structure
Technically, both COMB and COMG are actively managed, but in practice, they are mostly passive funds. The futures portion of the portfolio, up to 25%, is held in a subsidiary based in the Cayman Islands and generally reflects the index, while the collateral is held in a cash portfolio holding fixed-income securities that is managed stateside.
In addition to offering the opportunity to generate added income via the cash portfolio, the structure allows the funds to register as 1940 Act funds and, unlike older futures-based commodity ETFs, there is no Schedule K-1 tax form associated with the funds.
The 1940 Act structure includes a key difference from existing commodity futures products.
“From an investor protection perspective, they’re superior to the current commodity pool ’33 Act funds and/or ETNs,” said Rhind, citing the fact that 1940 Act funds are required to have a board that provides oversight that 1933 Act funds and ETNs don’t have.
However, K-1 forms are also a significant issue for futures-based commodity ETFs. Rhind points out that they involve added time, record-keeping and other administrative tasks for issuers, advisors and their clients, and more importantly, they are not always issued in accordance with the typical income tax schedule, meaning investors in a typical futures-based ETF may have to request an extension on their taxes.
Further, these added administrative tasks mean that issuers associated with the K-1 forms are forced to charge higher prices. The improved structure is part of the reason GraniteShares can attach rock-bottom expense ratios to their two ETFs.
Rhind says he believes the “K-1 free” structure will be the norm for commodity funds going forward and that investors will have no reason to invest in the legacy commodity futures products any further.
GraniteShares is a brand-new ETF issuer, and these are its first funds. It’s usually rough going for new ETF firms, but GraniteShares is backed by the investment firm Bain Capital, which operates in the venture capital, private equity and credit product spaces. Further, founder Rhind has deep roots in the ETF industry and was previously CEO of the World Gold Council’s World Gold Trust Services, sponsor of the SPDR Gold Trust (GLD).
Contact Heather Bell at [email protected].