Why Frank Holmes’ US Global Investors is soaring

When Frank Holmes took over as CEO of US Global Investors [GROW] in 1999, he set the investment management firm on track to reach the almost-$2bn in assets under management it had reached at the end of the third quarter last year.

Key to that growth was Holmes’ decision to enter the exchange-traded fund (ETF) market with the launch of the US Global Jets ETF [JETS] in 2015, which grew its assets from just $35m in March 2020 to as high as $3.5bn, Holmes told Opto. The fund has climbed 98.9% since its intraday low of $11.25 on 19 March 2020 (through 21 January), as investors bet on the airline industry’s recovery.  

While the firm only has two funds, including the US Global GO Gold and Precious Metal Miners ETF [GOAU], it ranks 32nd among global ETF issuers for revenue, according to data from ETFDB.

Global Investors itself was up a phenomenal 286.5% last year, though it has dropped 7.8% since the turn of the year (through 21 January).

Holmes has over 40 years of experience in capital markets, from working as a research analyst to trading from the sell-side. For the past 30 years, he’s worked on the buy-side as the CEO and CIO of US Global Investors. 

Here, Holmes talks to Opto about both the firm and the fund’s performances, while also providing his market outlook for the year ahead.

What’s behind US Global Investors’ 2020 performance?

“It was very broad. [The firm’s 286% gain] happened with very broad interests, both retail and institutional. Crypto prices took off. That rally was unprecedented and we had traded 2.3 billion shares. We've also had a sort of contrarian experience this past year. [Despite] the world being locked out with COVID-19, our JETS ETF went from trading 35,000 shares to 3.5 million.

We've had these two big billion-dollar companies, one is a corporation and one is an ETF, and a lot of people would never have thought that [growth would happen] a year ago. That makes 2021 very exciting because of the unexpected.”

How do you expect the JETS ETF to perform? 

“[Last year] millennials reminded me of the baby boomers when they discovered mutual funds or technology stocks in the 1990s. With so many millennial investors suddenly stuck at home, they took up trading.

"[Last year] millennials reminded me of the baby boomers when they discovered mutual funds or technology stocks in the 1990s"

But what is good about that is that it has price discovery. This creates more liquidity and it brings in institutional investors that feel they can take a bigger position that grows itself. This fascinating growth is what I think has been very, very helpful to the capital markets, especially in the US.

In the beginning, a lot of these millennial investors came to the JETS ETF because they were very aware of the airlines industry and a lot of millennials spent their money on experiences like travel. That was a big part. It’s interesting that they all of a sudden started playing the airline stocks because research shows that in the last 20 years, every time there's been a crisis, a year later, the airlines industry rebounds at 220%.

In Canada, we are seeing the airlines use artificial intelligence and rerouting. They're taking people from the north to the south to get into warmer weather. That business is booming. Tourism has been booming. However, business travel is not — everyone's on Zoom.”

How was the JETS ETF constructed?

“It's a very unique quant model that we back-tested for thousands and thousands of hours. It's not just looking for that sweet factor, such as growth or revenue. It’s unique because of the structure of the portfolio, how it rebalances each quarter, and the application of lots of laws of physics like mean reversion.

[Within the ETF] 40% of that portfolio is in the biggest [four] airlines in the US and they represent 68% of all domestic flight travel. [At time of writing, American Airlines [AAL], Southwest Airlines [LUV], Delta Air Lines [DAL] and United Airlines [UAL] made up circa 65% of domestic US travel.]

"[Within the ETF] 40% of that portfolio is in the biggest [four] airlines in the US and they represent 68% of all domestic flight travel."

What’s interesting is that 40% of the portfolio captures that, and then the rest of them started going global in Europe to Asia. As you get to smaller positions, like airports, they themselves all of a sudden started showing great cash flow numbers.

There are many ways to capture the airline industry because the airlines industry, directly and indirectly, is close to 10% of global GDP. It's a good handle on global economic activity and growth.”

How do you determine the most efficient airline company?

“One of the big parts is revenue per growth and looking at the number of seats they have. One of the things we've found was revenue from the last quarter was relative to their peers over the last four quarters, as was cash flow and ancillary revenue. When the airlines finally start to turn around, you'll see ancillary revenue come up.

The only real consistency that doesn't change except for mean reversion is the four big airlines. We don't know which is going to perform, so we just rebalance each quarter. When it comes to the other airlines, they have to show growth in revenue, growth in cash flow, be inexpensive relative to their peers, and enterprise to cash flow value.”

Do you expect to launch any more ETFs this year?

“We do, and we're also looking at a global footprint for Europe and Asia. What we found is that the GOAU ETF took a lot longer to get up to $100m — it’s more than that now — but that process was challenging because there's so many different gold ETFs out there. It's a crowded space, but when you go to where there's no one else, such as JETS, then all of a sudden you get this big interest.”

"when you go to where there's no one else, such as JETS, then all of a sudden you get this big interest"[/BLOCKQUOTE

What’s your outlook for 2021?

“We’re seeing a shift — all of a sudden data centres are becoming very valuable because more and more people are going to need data. This is putting bigger demand on technology and I don’t see that going away.

I think the [key] is to look for any company that says they're going to be hiring people. Those stocks usually have been a great leading indicator to trade higher — when Chipotle Mexican Grill [CMG] said they had to hire 10,000 people last year, their stock took off.

"I think the [key] is to look for any company that says they're going to be hiring people. Those stocks usually have been a great leading indicator to trade higher"

The other part that’s interesting for me is basic materials. Lumber prices in the US are up around 40% because of supply restrictions and this is making housing go up by [around] 10% in pricing. The inflation numbers are being way understated and the algorithms mixing with inflation are so out of touch with the reality of what we spend money on.

I think you're going see a continuation of volatility and trading opportunities in the JETS ETF. I remain very bullish on gold as an asset class. When we look at previous money printing exercises that come out of a recession, gold trades higher three years out.

I remain bullish on the stock market. For commodity demand, I see disruptions in the supply lines, but I also see that there's a big green movement. Commodities such as copper are going to become very important, and so is cobalt and nickel. We're going to see more and more solar energy. And there's a bigger pent-up industrial demand for silver, in addition to it being a monetary asset.”

To find out more about Holmes’ perspective on global markets, listen to his interview in episode 39 of the Opto Sessionspodcast.