| A WILD BET ON ETFS

from a room at WeWork, Will rhind is chal­leng­ing the gi­ants with gold, com­mod­ity and in­come plays and hop­ing for ap­proval of a bit­coin fund.

Forbes - - CONTENTS - BY WILLIAM BALD­WIN

From a room at We Work, Will Rhind is chal­leng­ing the gi­ants with gold, com­mod­ity and in­come plays and hop­ing for ap­proval of a bit­coin fund.

Nine­teen 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 seek­ers. The Se­cu­ri­ties & Ex­change Com­mis­sion has re­jected pro­pos­als for bit­coin ETFs from Gran­iteShares and oth­ers but ap­pears will­ing to re­con­sider.

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.

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.

“You may think I’m small, but I have a uni­verse in­side my mind.” —Yoko ono

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. Gran­ite Shares 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 Mini Shares Trust, with a fee of 0.18%, a hair be­low Rhind’s 0.2%.

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 would 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.”

Gran­ite Shares’ 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, Gran­ite Shares 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.

wall Street im­pre­sario william Rhind in his of­fice in man­hat­tan: a lit­tle in­fla­tion wouldn’t be bad for his hard-as­set plays.

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