Two new commodity exchange-traded funds that launched Monday are using the structure of the Investment Company Act of 1940 as one way to set them apart in a crowded marketplace for commodities ETFs.
The GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) and GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG) are the first of what’s expected to be many ETFs to roll off the line at GraniteShares, a company founded by Will Rhind, formerly a principal at iShares. He also served as head of ETF Securities in the U.S. and chief executive officer of the SPDR Gold Shares ETF (GLD).
The new ETFs are benchmarked to the Bloomberg Commodity Index and S&P GSCI Index, respectively. Because they are structured as ‘40 Act funds, they issue 1099 tax forms rather than K-1 tax forms.
The COMB fund has an expense ratio 0.25 percent and COMG is at 0.35 percent, making them cheaper than the vast majority of commodity exchange-traded products, which usually have expense ratios of 0.40 percent or more. Their ‘40 Act structure is unusual in a sector dominated by commodities pools, grantor trusts and exchange-traded notes.
Rhind says the ’40 Act structure is better for investors, adding that the independent board of trustees and board oversight mandated by ‘40 Act funds are much more investor-friendly than ‘33 Act funds or ETNs.
“You can raise fees on investors under the ‘33 Act; some commodity funds have done that,” Rhind says. “Under the ‘40 Act, that requires shareholder approval. Automatically it’s a better structure for investors. Then the other factor with commodity pools is they’re partnerships, so they distribute K-1s and investors really don’t like dealing with K-1s.”
To be under the ‘40 Act, COMB and COMG have an active fund structure and use a Cayman Islands subsidiary that buys the commodities futures to gain exposure to the index, Rhind says. He sees this as the way more commodity products will eventually be structured.
The two GraniteShares funds are both seeded with $2.5 million.
Rhind says GraniteShares seeks to “disrupt” the ETF industry with lower-cost funds, improving on fund structures and coming up with new investing categories. The company's two new funds hit two of the thee targets, he notes.
Although GraniteShares could not speak to investors ahead of the launch, he expects a good reception for the funds. He uses another ‘40 Act commodities fund, the PowerShares Optimum Yield Diversified Commodity Strategy No K-1 Portfolio (PDBC), as a proxy. That fund, which launched in November 2014, has $438 million in assets under management and an expense ratio of 0.60 percent. PDBC is a ‘40 Act version of PowerShares DB Commodity Index Tracking Fund (DBC), which has $1.99 billion in AUM and an expense ratio of 0.89 percent. It debuted in February 2006.