[This interview previously appeared on HardAssetsInvestor.com
and is republished here with permission.]
Graham Tuckwell, founder and chairman of ETF Securities, was
a driving force in listing the world's first physical gold ETF in
2003 on the Australian Stock Exchange, followed in 2005 by the
world's first oil ETF. And today of course, commodity-related
funds make up a growing portion of the $1.5 trillion ETF
industry. Tuckwell's U.K.-based ETF Securities now offers more
than 200 exchange-traded products that offer access to equities,
currencies and commodities. HAI Managing Editor Drew Voros
recently spoke with Tuckwell about the ETF industry as a whole
and the strategies that guide his company's products.
Hard Assets Investor:
As a pioneer in the ETF industry, could you give me some
of your impressions on how the ETF industry has
It certainly has exceeded everybody's expectations. In some ways
not surprisingly, but when you start from a zero base, it's hard to
be confident and say, "This is going to open the commodity markets
to all and be nearly a $200 billion market in just over a
half-dozen years." In some sense we're not surprised, but we're
very pleasantly surprised that it's actually achieved what many of
us thought could well be possible.
Are you surprised at the breadth of the products? Or did
you think that if one works, they're all going to work?
When I started looking at this, I was only looking at the gold
products. To be honest, I didn't actually know what an ETF was.
They didn't really exist in Australia where I started the product,
but I soon learned about it pretty quickly. But the ETF industry
was somewhat in its infancy, particularly in Australia and Europe,
although it had been around a few years in the U.S. I quickly
latched onto the concept that it wasn't just gold; it could be a
whole lot of other commodities. But clearly that required different
technology. And I really wasn't aware of how the indices worked for
tracking commodity prices, priced off futures markets.
That's why when we came out with the oil ETFs, which was our
first-ever commodity product outside of gold, we in fact had our
own formula built into the prospectus rather than tracking an
index. We built that product from first principles based on the
assumption that it had to actually match the position a futures
trader would take in the market, because if it didn't, it could be
arbitraged against us by the futures market.
As it turns out, of course, the formula that we invented matches
what is now used in commodity indexes. Because back when we did the
first oil product, there were only composite commodity indexes;
there was no such thing as an individual commodity index.
Therefore, I didn't look too deeply into how these commodity
indexes were built.
So it was only when I approached the Dow Jones-AIG Index people
to create an individual commodity index for the first time that we
realized that the way they built them was exactly the way that we
had already built our oil product.
What was the initial reasoning behind the first gold ETF
I was on the investment committee of the Australian Gold Council.
I'd been asked to attend a few of those meetings. And at one of
those, the Australian Stock Exchange had come along and said,
"Look, a couple of banks have approached us wanting to do options
on gold. But in order to list the options, we need to have some
form of the underlying listed in order to price them.
And I said, "Well, that's a good idea; you should list gold on
the [Australia] Stock Exchange." They said, "Yes, but the problem
is we only list companies on the Stock Exchange, because that's
what it's for:stocks." I thought, "Surely, we can come up with some
sort of mechanism." I said, "Well, we should do it. Maybe we should
invent something to do it." And everybody thought, "That's really a
And I said, "Well, who's going to pay for it?" And then that's
when everybody sat on their hands. And I said, "I think it's a good
idea; I'll pay for it. But if I pay for it, I'm going to own it."
So that's what happened and we managed to get it done. That
structure has now stood the test of time. But the interesting thing
was, when I went to get it listed, I said to the Australian Gold
Council, "I'd like your support in this." And they said, "Well, Mr.
Tuckwell, we're not too sure you're worthy of our support. We are
the Australian Gold Council; perhaps we should only give it to a
big investment bank, not a small guy like you."
I thought, well, I don't like that. So I promptly went and
talked to the World Gold Council and they said, "Yeah, that's a
fantastic idea; we'd love to support you." And that's actually why
the World Gold Council appeared in the prospectus and not the
Australian Gold Council.
And of course later the World Gold Council co-opted your
idea for the SPDR Gold Trust (NYSE Arca:GLD).
Well, to be fair, one of the members of the World Gold Council,
Pierre Lassonde, had thought of the concept and talked to the World
Gold Council about doing some sort of gold product. That was still
in its relatively early stages when I was doing mine. He
subsequently became chairman of the World Gold Council. Had I known
how big the GLD ETF was going to be [$73.5 billion in AUM] right at
the beginning, I would have moved the whole family straight to the
U.S. and spent all of my money building GLD and got that out
What are some of the biggest disappointments in the
development of the ETF industry, in your perspective?
There has been a lot of negative publicity about ETFs coming from
various sources, particularly last year. I thought that was
complete overkill. I sort of totally expected a criticism coming
from active managers because ETFs are going to gradually eat their
lunch. There will always be a place for active managers, but
instead of ETFs being, say, 20 percent of the market, and active
managers being 80, it should be the other way around. Managers
should be paid for asset allocation, not so much for stock picking.
But there's always a place for really good stock pickers, as we
I think it's fair enough for regulators to look at the ETF
industry, because it's going to grow and grow and grow. And the
larger it grows, of course, the more understanding regulators
should have of it. But I think there's nothing particular I've seen
that's inherently wrong in ETFs. They are a recent invention
because they generally depend on computers to price them intraday,
unlike mutual funds, which are priced at the end of each day. I
believe that for the most part, people would never have invented
mutual funds in their current form had they had computers.
It's more a case of who's selling them, and education. They
should be correctly labeled and only marketed to those people who
really understand them. You want an open market; you don't want to
regulate markets out of existence.
We have to make sure that intermediaries are actually educated
themselves on selling to their clients. Because most products, as
we know, are sold, they're not bought. So the problem I see is not
so much with the ETF providers as such; it's with the knowledge of
the intermediaries and making sure they understand them.
HAI:A lot of people talk about alpha-generating commodity
products. Is that an oxymoron?
Yes, I think it is when referring to attempts to optimize roll
strategies. There are a lot of people who have been around the
commodities markets for many, many years that are well aware of how
to trade out along the curve and do things in different ways. We in
fact have two types of products:The normal ones, that we call the
classic products, which are the short end of the curve; and we've
got a whole suite of products that prices six months out.
And what we've found is simply by just doing that, going six
months out, it's actually outperforming most of these so-called
smart indexes, which is interesting in itself. In other words,
smart indexes look to be good on paper, but in practice, they don't
deliver much more than what one can obtain just by going further
out on the curve and sticking to some simple rules.
In other words, just by avoiding the contango by going further
out is all that is needed, if that's where the markets happen to
be. And of course in certain markets, the front end of the curve
product will perform best.
Clearly precious metals have worked as a commodity for
exchange-traded products. Are there some major commodities, let's
say for instance, agricultural products, that just don't work as
I think you're right. Over a long period of time, some of the
agricultural products tend to behave as an inherent contango in the
market. But the fact is, if prices are going up faster than the
contango is eating away at them, then you can still get a good
HAI:Despite gold's correction, we're not seeing much in
the way of outflows from gold funds. Why do you think that
Perhaps the investors in our products and precious metals ETPs are
there for a specific reason and not trying to speculate on price so
much; they're trying to have it as part of a balanced portfolio. So
what we tend to see is if prices run quite high, they will often
sell, so we get redemptions. And then when prices pull back, that's
when we get the creations. And you would say, "Well, that's a very
logical thing to do; gee, we've actually got logical investors."
Whereas what you find in many stock markets is when it rises like
crazy, that's when all the buying comes in; you know:"When the
bellhop is buying, you've got to exit." We see more logical
behavior in our products.
HAI:What kind of innovation do you think there's room for
in the industry?
The next big step has to be a far broader usage of ETFs. They
should be available to a much wider audience. For example, wider
adoption of ETFs in the 401(k) market in the U.S. is a logical one.
The audiences that have bought into ETFs have been somewhat narrow.
But I think there is still a great deal of the investment community
that doesn't necessarily know about ETFs very much at all. And
that's certainly the case in some of the global markets. If you
look at some of the markets in Asia, they've hardly got any ETF
industry, if at all. That will definitely flow through. But I think
you've still got significant gaps in the markets, even in the most
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