After oil’s dramatic price drop, a fast-emerging ETF company is encouraging Canadian investors to look south for more diversified, better value exposure to commodities.
Will Rhind, an Englishman in New York, formed GraniteShares two years ago in the belief that the asset class was about to emerge from a bear market. He believes that thesis has been justified, with his new company growing from US$40 million AUM at the start of the year to US$400 million.
Its growth has been propelled by a surge of interest in its flagship fund, the GraniteShares Gold Trust (BAR), but Rhind believes its two broad commodities ETFs – the GraniteShares Bloomberg Commodity Broad Strategy NO K-1 (COMB) and the GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG) – are ideal for investors who want to stay exposed to oil but within a more diversified fund.
He believes the cost of the funds may interest Canadians keen to swerve the country’s notoriously expensive fees. Rhind explained that COMB (0.25% fee) is the lowest-cost way to get exposure to the Bloomberg commodities index, while COMG (0.30%) achieves the same feat with the S&P GSCI. Similar funds in Canada, he argues, charge about 1%. BAR charges 0.17% and is the cheapest gold ETF in the world.
Rhind said: “We suggest people consider something a bit more diversified rather than pure exposure to oil so, for example, investing in a broader commodity ETF. COMG has a much higher exposure to energy that COMB and by doing this you get energy that has positive correlation to the oil price but you’re also investing in other commodities as well, so you’re a bit less exposed.”
He added that the oil market remains a largely fundamental story of oversupply as a result of US policy over its Iran sanctions and Saudi Arabia’s counter measure to address a perceived shortage. Many are now hoping for an oil “bounce” with an OPEC meeting on the horizon in December and talk of supply being cut.
“The rumour would be that they come up with a plan to take one million-plus barrels off the market per day to try to address that. All things being equal, this would mean a price increase.
“That’s why you see some chatter in terms of the price dropping off significantly, as well as some other risk assets, but it's then viable to bounce back given the fact that the larger OPEC members are going to try and agree to a supply cut in December.”
For Rhind and colleagues at GraniteShares – which include Canadian and former Horizons ETFs employee Kristen Winther – the commodities opportunity is about more than just the oil drop. He believes that investors are looking for ways to hedge risk as the bull market, by consensus, heads into its latter stages and the US economy operates at full capacity.
He said: “I set this business up in 2016 and the thesis was that commodities have been in a bear market for a number of years and it felt like that was starting to change and that the supply demand fundamentals had got a lot better. It felt like commodities were due for a bounce back and, to a large extent, that’s what’s happened over the past couple of years.”
He added that some of the demand was as a result of overcutting supply at the bottom of the bear market, which led to a shortage of commodities and price increases. However, he said there were also concerns over US inflation.
“In the US, the economy is pretty much at full capacity and investors are worried about the return of inflation and are looking at ways to hedge that risk – that’s why we’ve seen a lot of re-emergence of investment in the asset class more broadly.”
This fear about the economy has played into GraniteShares’s hands with regards to its gold ETF, which has almost US$288 million AUM. While Rhind believes some of its success is down to investors moving from existing gold positions into lower-cost exposure, he said the other reason is down to people repositioning.
He said: “People are now looking to rebalance risk assets within the portfolio and so, therefore, are going risk off or reallocating money to things like treasuries to the shorter-dated end of the treasury market and gold.”
He added: “[Investors] are thinking about what the next 5-10 years looks like. People have been treated so well by risk assets in the last 10 years that with the Fed tightening, people are starting to think about whether this is the end of this particular phase and how you get exposure to other things that are maybe less uncorrelated. That’s been a theme of this year and will just continue.”
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