There aren’t many people in the financial services world who can claim they’ve helped launch a gold ETF, an airline ETF and a blockchain company, but Frank Holmes is just such a person. He’s the CEO and CIO of U.S. Global Investors and the Executive Chairman of Hive Blockchain and he recently joined the ETF Think Tank to discuss everything from the current cryptocurrency landscape to the tax efficiency of ETFs.
Given his background in the ETF space, Holmes was asked if he agreed with the traditional narrative that ETFs will eventually overtake and kill the mutual fund business. He feels the primary advantage that gives ETFs the edge is its structure. Tax optimization allows more money to stay in investors’ pockets regardless of performance. The recent mutual fund to ETF conversions by both Guinness Atkinson and DFA demonstrate that the traditional fund houses also see the value in ETFs. Many investors came to ETFs because of the ultra-low cost passively-managed structure, but the success of ARK proves that if you’re good at the game, the money will still come even in higher cost active ETFs.
He’s also quick to note that it’s not a “tax loophole” that makes ETFs advantageous. It’s simply a product and benefit of the structure. You didn’t even get much pushback from the regulators because they realized it ultimately promotes good investment behavior. It makes sense that investors shouldn’t be forced to pay taxes for other people’s transactions. He also believes that investors should look to avoid ETFs that make capital gains distributions, of which approximately 5% do every year, because it amounts to laziness on the part of portfolio managers.
Holmes is asked if he could ever imagine the story of the U.S. Global Jets ETF (JETS), which his firm oversees, playing out the way that it did, which saw its assets under management balloon from around $40 million to more than $4 billion over the course of a single year. He mentions the quote he’s heard that “the best way to succeed is to survive”. He acknowledges that the environment was challenging as the COVID pandemic was growing, but noticed that the Robinhood traders, who were driving the growth, were actually sophisticated players in the space and understood the business. Those folks got on board early and when the economy began to turn around, the growth story really accelerated.
In terms of cryptocurrency, Holmes believes that investors should have roughly a 2% stake in their portfolios, a smaller component given how volatile they are in the short-term. Investors might default to investing in Bitcoin for this position, but Ethereum is the backbone of blockchain. Given its disruptive potential in the smart contract space, many crypto enthusiasts now prefer Ethereum to Bitcoin, noting that the number of Ethereum miners now exceeds the number of Bitcoin miners. Millennials will be the ones to drive acceptance and use of cryptocurrencies forward because they’re the ones that best understand it. He also likens Ethereum to silver and Bitcoin to gold explaining that there are more practical applications for silver/Ethereum.
The conversation wrapped with Holmes being asked where he thinks we are in the market cycle. He mentions that growth rates are beginning to come back down but believes the biggest driver of change could be what happens with monetary and fiscal policy. Right now, he believes that it’s a lot of sword fighting and mudslinging. If tax policy gets modified, that will change the narrative, but right now it’s a lot of talk.
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