Gold has been on a run lately, trading around a six-year high of US$1,500 per ounce amid concerns around the impacts of the U.S.-China trade war and the slowing pace of global economic growth.
Besides geopolitical risks, gold is also rising due to dovish interest rate policies at the U.S. Federal Reserve and continued central bank buying of physical gold in recent years by countries such as China and Russia.
While gold has pulled back from the US$1,550 per ounce level reached in August, a handful forecasters predict the price to rise again and average around US$1,600 per ounce in 2020, as recession worries continue.
Investors are once again wondering whether it’s time to buy into the precious metal – and how to place that bet. If making the wager through exchange-traded funds, the options include buying into funds featuring gold equities or physical bullion.
Investors hold gold equity ETFs and gold bullion ETFs for different reasons, says Yves Rebetez, an ETF analyst at Mississauga, Ont.-based Credo Consulting Inc.
Physical gold bullion is considered insurance against an economic disaster that would drag down the stock market, he says. It’s also a hedge against inflation. Gold companies benefit from the rising price of the precious metal, but are considered more volatile given their various operational elements.
“When the market gets significantly shaken, gold equities can get dragged down and, at that point, they can give you more downside participation than you might like," says Mr. Rebetez. “The simplicity of owning gold bullion ETFs and sidestepping the potential operational, environmental and geopolitical risks associated with owning gold companies is responsible for their surge in popularity over the past 15 years."
Investors need to decide if they are buying gold as a hedge against inflation, to round out a portfolio, or to try to capitalize on a rising trend, says Craig Ellis, a portfolio manager with Bellwether Investment Management in Oakville, Ont.
“When we think about the role of gold exposure in a portfolio, it is really from a diversification standpoint or a risk-mitigation strategy,” Mr. Ellis says.
“We look at gold comprising five-to-10 per cent of a portfolio serving as a hedge against quite a number of different uncertainties. That might be concerns about currencies, inflation, deflation, there are a number of uncertainties geopolitical issues right now. Gold can often provide some sort of protection against those types of factors.”
When adding gold bullion ETFs, Bellwether focuses on funds that invest in physical gold rather than those providing exposure through derivatives. The firm’s two preferences are the iShares Gold Bullion ETF (CGL), which gives exposure to physical gold and is hedged to Canadian dollars, and the U.S. dollar-denominated iShares Gold Trust (IAU), which offers a physical gold exposure with a slightly lower expense ratio than the popular SPDR Gold Trust (GLD), which also trades in U.S. dollars.
If gold prices stay strong, investors may also consider buying gold mining companies that are now poised to benefit from years of cost-cutting and industry consolidation.
His firm likes the iShares S&P/TSX Global Gold Index Fund (XGD), which is the top gold equity ETF in Canada in terms of trade volume. It’s top three holdings include dominant industry players such as Newmont Goldcorp Corp., Barrick Gold Corp. and Franco Nevada Corp. among 36 mining companies. Its management expense ratio (MER) is 0.61 per cent and has returned about 35 per cent over the past year.
Another fund to consider is the Horizons AlphaPro Enhanced Income Gold Producers ETF (HEP), which provides unitholders with an equal-weighted portfolio of North American-listed gold mining and exploration companies. The fund’s MER is 0.65 per cent has returned about 26 per cent over the past year.
The BMO Junior Gold Index fund (ZJG) is another option for investors looking to invest in smaller gold exploration, development and mining companies. The fund includes junior gold stocks that comprise the Dow Jones North American Select Junior Gold Index. Its top-three holdings include Detour Gold Corp., Alamos Gold Inc. and Pretium Resources Inc. and has an MER of 0.60 per cent. The fund has risen by about 22 per cent over the past year.
There’s also the Horizons Gold Yield ETF (HGY), which offers Canadian-dollar-hedged exposure to gold bullion and a covered-call options strategy as a way to create income. Its MER is 0.6 per cent and has seen a return of about 11 per cent year-over-year.
Horizons also has the Horizons Gold ETF (HUG), which tracks the performance of the Solactive Gold Front Month MD Rolling Futures Index and hedges U.S. gains and losses back to the Canadian dollar. Its MER is 0.65 per cent with a return of about 18 per cent over the past year.
Whether it’s gold bullion or gold miners, both ETF options are seen as a way for investors to diversify their portfolios and hold some insurance against falling markets.