Will Rhind is the founder and CEO of GraniteShares. He is an 18-year veteran of the ETF industry, having previously worked at the World Gold Council and iShares. In this wide-ranging interview, Rhind discusses his outlook for gold and how it stands relative to bitcoin; the WallStreetBets silver phenomenon; GraniteShare’s noncommodity ETFs; and whether it’s possible to generate alpha through active management.
ETF.com: We saw gold hit an all-time high last year above $2,000. It’s cooled off a bit since then. What’s your outlook for the metal?
Will Rhind: I'm very positive on the outlook for gold. Coming into the depths of the COVID crisis last year, gold was trading as a safe haven asset as certain sectors of the market were affected badly by the virus, and obviously, the economic outlook more broadly was incredibly uncertain. That backdrop was very similar to what we had post-financial crisis, during which we had huge amounts of stimulus that supported the market recovery.
In that regard, the COVID policy response is similar to what we saw in 2008, but a magnitude of size greater than what we saw back then. Remember that the gold price around the financial crisis was about $800/oz, and then quickly went above $1,000, and never looked back.
Last year, the gold price increased to a record high again and it’s been consolidating ever since. The conditions that exist in the market today are still very conducive towards gold investing. The drivers are: a more positive inflationary outlook on the back of the money printing and the stimulus; real interest rates that are falling; and a weaker dollar. Those conditions I think will continue over the foreseeable future, meaning gold will have a place in the portfolio.
ETF.com: Your product, the GraniteShares Gold Trust (BAR), is incredibly cheap and has attracted tons of interest. How do you think it differentiates itself within the broader gold ETF universe?
Rhind: When we started GraniteShares, we started with a simple mission, which was to bring low-cost commodity investing to the ETF market. At the time when we launched, all the gold ETFs in the market were significantly more expensive. iShares was the lowest, at 25 basis points, and all the other ETFs were around 40 basis points or more.
There was a market opportunity to set a low price in the gold ETF space and more broadly in the commodity ETF space. We did that.
Obviously, being that gold is such a big category, when we started gathering assets quickly, we got competition. We had competition from State Street, from Aberdeen, from other providers that came into the market, but still, we remain among the most competitive from a fee perspective.
The value proposition for BAR is very strong. We have low fees, we have a share price which is lower, and we custody purely in London, because we don’t want to have the intermarket risk that some of the other ETFs have that custody metal in other countries outside the U.K. while striking a NAV based on London gold.
ETF.com: Gold has been somewhat overshadowed by bitcoin recently. Do you think the cryptocurrency is a threat to gold?
Rhind: I don't think bitcoin is a threat; it’s a very different asset class. It's no different than what silver is to gold, or to any other asset that doesn't have a yield that may or may not compete with gold for allocations of capital.
With bitcoin, the one big thing it has in common with gold is it's marketed in a very similar way—everything from the terminology that's used in terms of mining, to the way it's marketed as a store of value, to the way it’s described as uncorrelated to the stock market; all of this is very similar to gold.
There's no doubt there will be some people that will buy bitcoin instead of gold, but there will be plenty of people that buy gold and not bitcoin. And there will be plenty of people that buy both.
The right answer is that, depending on your risk tolerance, there's room for both in your portfolio, because they're both trying to do similar things, which is offer people an alternative asset class that has a low, or no, correlation to stocks and bonds. Gold has just been around for a lot longer and, clearly, it's a physical asset, whereas bitcoin's completely digital.
ETF.com: A couple of weeks ago, there was a pretty crazy story about the WallStreetBets Reddit crowd getting into silver. What's your take on that?
Rhind: The reason the WallStreetBets crowd focused on silver is because of this long-standing theory that silver is a heavily shorted market by professional investors.
The narrative was quite similar to GameStop in terms of there being a small group of professional investors—in this case, banks—who were shorting the silver market and, therefore, this is something individual investors can take advantage of and cause a short squeeze.
But a big difference between silver and GameStop is that, in GameStop, you have hedge funds that were short the stock, and they were short for speculative reasons. With the banks, the problem is they very often have a legitimate interest in being short.
For the short positions that they may have on the futures side, there could be offsetting long positions on the custody side, where they're holding physical metal. The primary business of banks when it comes to metal is they borrow metal from the market, and they then use that metal to sell on to customers, who may be refiners, industry, corporations, etc. But that's their primary business.
Proprietary trading was banned as a result of the Volcker Rule, which is one of the legacies of the financial crisis. So, this idea that banks have big proprietary trading groups taking outright or huge speculative short positions in silver or any other metals doesn't exist anymore.
Another point is that commodity futures are traded on an exchange. It's highly regulated. There are margin requirements that are set by the exchange to limit highly speculative activity and volatility. And the exchange also has position limits to stop people cornering markets or taking very large positions in one or more commodities.
These things taken together mean silver is just a much different proposition than what is effectively a small cap stock in GameStop. For that reason, it was pretty exciting to watch, but the silver price never went up more than 10% due to WallStreetBets, and then it quickly came down.
ETF.com: GraniteShares is well-known for its commodity products—the gold, the platinum and the broad commodity products. But what a lot of people might not know is you have ETFs targeting other asset classes. Would you talk about some of those?
Rhind: The GraniteShares HIPS U.S. High Income ETF (HIPS) is our income strategy. The idea is to provide a high level of consistent income that's paid monthly. The ETF pays the same distribution every month, which is 10.75 cents/share, and it's done that since inception.
With HIPS, investors can try and plan a bit more around their income needs. Right now, it's a 9-10% yielding ETF, and it's been very popular for people looking for income.
In the current environment, traditional strategies are just not able to offer any kind of meaningful income. HIPS invests in pass-through securities, things like REITs, MLPs, BDCs, etc. And the relevance of that is that pass-through securities don't pay corporation tax. So off the bat, you have a higher level of income.
ETF.com: You have another fund, the GraniteShares XOUT U.S. Large Cap ETF (XOUT), which has actually done very well, outperforming the S&P 500 by about 1,300 basis points over the past 16 months. Would you talk about that fund?
Rhind: I've been involved in asset management and ETFs all my life. I was schooled in a doctrine of, “You can't outperform; markets are efficient.” Therefore, you just need to own an index fund. Further evidence of that was the SPIVA reports and things like that, which continued to suggest that traditional active management doesn't work.
But it's not that outperformance is not possible. It's just that picking winners, as a philosophy, is something that's really difficult to do. The opposite of picking winners is, of course, buying every stock in the market. And that's the traditional passive indexing that we all know.
The byproduct of that has been you have huge capital inflows into index products in the traditional passive space, writ large. But that causes misallocations of capital, because you have tons of money flowing into major equity benchmarks, and obviously, the funds have to buy every stock in the market, regardless of whether they're good or bad stocks.
XOUT’s thesis is really to flip that on its head and say, if picking winners is really difficult, almost impossible, and the obvious flaw in traditional passive investing is to buy every company in the market, regardless of whether it's good or bad, is it easier to identify bad companies and exclude them? And do you get to a better portfolio by excluding the bad companies?
That's the philosophy behind XOUT, but we do that with a disruption lens. We want to think about forward-facing risk, particularly tech-disruption-related risks, that could affect companies.
We have seven fundamental metrics that we blend together to score each of the top 500 companies by market cap. The 250 companies with the lowest scores get excluded, so what you end up with is a portfolio of 250 names that are then reweighted by market cap.
The backtest for this strategy was compelling, but in real life, the strategy has outperformed the backtest, and has added considerable alpha.
Contact Sumit Roy at [email protected]