My view is very bullish on gold for the next decade. As the world gets wealthier, it won't be as dollar centric as it was after World War II. The growers are China and India, which don't have a dollar based system. Gold is the next global currency. Central banks are buying it, and so are private investors. Inflation and geopolitical risk are secondary; it's more of a wealth effect.
All right, welcome to this special episode of Trends with Benefits. My special guests today are Jan Van Eck and Adam Phillips. We are going to talk about the history of VanEck's ETF business, especially on the 20th anniversary of GDX. It was the first ETF VanEck launched. Gold is near an all time high and gold miners are coming around. I look forward to discussing how and why VanEck launched GDX and the outlook for gold.
Happy to be here. Thanks, Ed.
You can be on anytime you want. As I teed up, we are going to talk about GDX. It started the ETF business at VanEck. Can you give us some perspective on how that came about? How and when you joined the firm and how you came up with the idea to launch this ETF at a time when the structure was new in the marketplace?
Well, I joined VanEck in 1992 full time. I had worked there before. All the revenue was associated with a gold miners mutual fund called International Investors, which started as an equity fund and switched to a gold fund in 1968. Every day I tried to diversify the firm away from gold mining companies. Gold peaked at $850 in 1981 and then went down to around $250. Gold shares are leveraged to bullion. We launched emerging markets funds, got involved in hedge funds. In grad school, one of my professors, Joe Grundfest, a former SEC commissioner, said active management is dead and you really want index funds. That opened my mind to indexing. I had colleagues from Fidelity. ETFs were on the horizon. We knew people liked to trade gold mining shares. We wanted to get our ETF to market faster than iShares.
Well, some of these things you only learn much, much later, like years and years and years.
They were afraid to tell you how they felt?
I can give you another example. At the time, I've never been a portfolio manager. Many asset management companies are run by portfolio managers, which closed them off to ETFs. My brother Derek, the CIO, always wanted to diversify. He came up with some good ETF ideas before he passed away. If I had asked our gold portfolio managers, they probably weren't wildly enthusiastic. We filed for a Bitcoin ETF in 2017 when Bitcoin was $3,000. Only years later did I realize how crazy most of my colleagues thought I was about Bitcoin. One director said they should buy half a percent of their fund, but they thought it was nuts.
Given that ETFs were a new product structure and VanEck had no experience with them, how difficult was it to get going? You had to go through the registration process and market dynamics. Adam, that's where you come in. You joined the firm and can talk about the transition and helping VanEck get an ETF to market.
I joined about a month or six weeks before we launched GDX in May of 2006. Prior to that, Jan and others had been working with the American Stock Exchange on building the index. It took a few years and was iterative. The index was more comprehensive. Our exemptive application was at the SEC for over five years. When I got there, the pain and suffering of the team had already concluded. It was a matter of making sure the trading community had confidence. GLD launched in late 2004, so the market was interested in gold. The GDX index had about 44 US listed stocks. It was a tight basket to trade given the volatility.
And you were trading ETFs at the exchange prior. Given what you saw with gold shares, did that give you confidence that the gold mining ETF would take off?
When I met Jan, he was looking for someone who knew ETFs. I wasn't totally convinced it would work, but the space was new and had as good a shot as anything. It was the right time and place.
Jan, why do you think it worked and how long did it take?
Getting the fund approved at the SEC was like a marathon. There was no door to knock on. We used outside counsel. After not making progress for a year and a half with one law firm, we switched. The new lawyer knew where the right door was. The relationship with the SEC has been great. The second part post trading is Adam's expertise. The great value of ETFs is liquidity. Adam's insights as a market maker were crucial. Every year he would tell me if an idea was stupid because market makers couldn't hedge. That served us well. With gold mining shares, it kind of traded automatically because people wanted that exposure.
Were there any internal benchmarks at launch, or was it just put it out there and see?
It was put it out there and see how it does. It traded about 200,000 shares the first day.
I think it traded between five and ten million, probably seven or eight million that first day, which was pretty good.
Those were the days when a new ETF would get press. You'd go to the exchange and have media junkets. Did that happen?
I remember meeting a friend downtown at Odo, an Italian place. I met the lawyer who had been working on the prospectus, Allison Fume, by coincidence at the bar. That was a fun story.
Adam, getting the ETF to market, what did it take? Just smiling and dialing with market makers?
The magic of ETFs is that individual investors and large hedge funds all trade the same liquidity pool. With gold, you had individual investors following that space. There was a natural involvement by all kinds of investors. We did an awareness campaign across investor types. We made sure the trading community knew it was there. The sales team at VanEck was smaller then but had a database of natural resources oriented investors. It turned out the investor base was slightly different - more tactical than our mutual fund investors.
You don't really know who's buying. That's the weirdness of ETFs. The magic is you see the price every minute, but you have no idea who it is. We could make an educated guess. Only 5 or 10% of financial advisors allocated to commodities or gold. Being in that community helped.
The profile of these stocks having volatility and being linked to the macro makes people want to trade them. Once it got going, it became heavily traded. For over 12-15 years, it's been a top 20 traded ETF, trading over $2.5 billion a day.
The brokerage community knew VanEck in gold shares because we were the biggest investor in that industry. Every CEO would come through our offices. We had credibility around the index.
Were there other considerations of other types of ETFs, or was it gold first?
We just wanted to get one out the door. We were pleasantly surprised. Our general counsel at the time took me to lunch a couple weeks after launch and figuratively shook me, saying, 'You're in the ETF business, you should be aggressive.' I had an old CEO at VanEck, Roger Lawson, who said if a business isn't doing well, hit the brakes; if it's going well, floor it. There hadn't been many businesses at VanEck with that much positive momentum. So we went for it.
Two things happened after that lunch. First, there were bright people like Derek, Jan's brother, with great ideas. Second, Jan told us that in addition to diversifying away from gold, it was now our job to help him do that. So we all had to come up with new ideas.
How did we land on munis out of that?
There weren't muni ETFs; it was a brand new space. Every asset class with mutual funds will have an ETF version. The key with fixed income is liquidity. Adam's expertise helped.
What stands out to you in terms of what you learned most from the GDX experience for product development?
You just have to experiment. We knew so little about ETFs. I was in my 40s when we started that business. People think career is a straight path, but it's like a bumblebee going all over the place. You just keep swinging, even later in your career.
We try to come up with something that appeals broadly to as many investor types as possible. You need a vision of daily capacity and liquidity. Different iterations of what's already out there are okay to look at. The best way isn't always already in the market.
Do you recall in 2006 where gold was and how gold miners were doing generally?
It launched at about $40. It spent a lot of its life below $40. After the financial crisis, gold rallied, but then gold shares from 2011 to 2016 went down 90%. That period hurt.
The fund had a strange inflow outflow dynamic. We tend to see more inflows on the way down than on the way up. On the way up, assets rise from price appreciation; on the way down, inflows stabilize it.
