Sparked by a flight to safety during the COVID-19 crisis, investors are turning to gold as a haven, which has boosted the price of the precious metal and led to a high demand for Canadian gold-equity and gold-bullion exchange-traded funds.
“People definitely use gold as a form of ‘apocalypse insurance,’” says Daniel Straus, head of ETF research and strategy with National Bank Financial Inc.
The demand has sent the price of gold above US$1,700 an ounce, an increase of about 11 per cent so far this year and about 32 per cent over the past year.
Canadian gold ETFs saw a surge of interest in April, pulling in $382-million – the biggest monthly gain in four years, according to National Bank’s monthly ETF-flows report.
The gold-ETF market in Canada is now worth nearly $3-billion, double from a year ago, says Ian Tam, director of investment research with Morningstar Canada. Gold-equity and bullion ETFs have all seen double-digit gains so far this year and in the past 12 months. However, “on the whole, equity ETFs have outperformed [bullion ETFs] year-to-date,” he says.
What’s the best bet for investors who want a bit of gold in their portfolio as a hedge against market turmoil, inflation or for diversification? Gold-equity ETFs, which own shares in gold-producing companies, or gold-bullion ETFs, which own physical gold and aim to replicate the price moves of the precious metal?
Both have seen sharp gains. In the past year, stock prices of the largest gold producers, Barrick Gold Corp. and Newmont Mining Corp., are up more than 100 per cent, adds James Gauthier, head of product research and oversight with Industrial Alliance Securities Inc.
What an investor chooses to do “will be a function of your opinion of the biggest gold producers in the world versus a more diversified approach,” he says. “If gold continues to go up, both of these will continue to do well.”
Many gold producers have been able to reduce their cost per ounce significantly, so when the price of gold rises, they benefit more. “That’s why you see these gold companies generally performing better than the price of bullion when the price of bullion is moving higher,” Mr. Gauthier says.
Looking at gold-equity ETFs, Mr. Gauthier points to the iShares S&P/TSX Global Gold ETF (XGD-T), which is a top performer with a year-to-date return of about 32 per cent and a whopping one-year return of 94 per cent. (All price returns are from Morningstar as of May 12.) XGD has $1.3-billion of assets under management (AUM) and a management expense ratio (MER) of 0.61 per cent (all AUM and MER data from Morningstar). Investors poured $117.8-million into the fund in April. The market-weighted fund has nearly 50 per cent of its assets in the biggest gold producers, including Barrick, Newmont and Franco-Nevada Corp.
The BMO Equal Weight Global Gold ETF (ZGD-T) gives global gold stocks an equal weighting instead of a market weight. Its year-to-date total return is about 17 per cent, and its one-year return is 82 per cent. Its AUM is about $202-million and its MER is 0.62 per cent. “There’s much less concentration risk,” Mr. Gauthier says.
The iShares Gold Bullion ETF (CGL-T) is the largest Canadian bullion ETF with about $675-million in AUM. In April, investors put $102-million into the fund, which has an MER of 0.55 per cent, a year-to-date return of 12 per cent and a one-year return of 31 per cent. It has 8.6 tonnes of gold in trust, according to the iShares website.
“These gold ETFs actually do own the physical gold; it’s in vaults,” Mr. Gauthier says. But “generally these things are not convertible into physical gold under normal circumstances.”
Another option is Purpose Investment’s Gold Bullion ETF (KILO-T), which has about $66-million in AUM, a year-to-date return of 11 per cent and a one-year return of 29 per cent. Its fees are a bit lower, with an MER of 0.26 per cent.
“For long-term, buy-and-hold investors, if you want just a little bit of gold in your portfolio and you want to minimize fees, then KILO is a good one to use,” Mr. Straus of National Bank says.
He also recommends investors look closely at their equity holdings before buying a gold-equity ETF as they may already hold those top stocks and would diversify their portfolio more effectively by holding a bullion-based ETF.
“If you’re using gold in your portfolio as a diversifier, holding the bullion makes the most sense,” Mr. Straus says.
David Kletz, vice-president, portfolio manager and ETF analyst with Forstrong Global Asset Management, says his firm prefers the SPDR Gold Trust (GLD-A), one of the largest U.S. ETFs, which tracks the spot price of gold and is backed by gold bars held in vaults in London. It has a year-to-date return of about 12 per cent, a one-year return of 32 per cent, US$59-billion in AUM and an MER of 0.4 per cent.
Mr. Kletz points out another U.S. bullion ETF is the iShares Gold Trust (IAU-A), which aims to reflect the price movements of gold and has 428 tonnes of gold in trust. It has US$23.5-billion of AUM and an MER of 0.25 per cent. The ETF is up 12 per cent year-to-date and about 32 per cent over the past year.
On the equity side, Mr. Kletz’s firm targets the VanEck Vectors Gold Miners ETF (GDX-A), a U.S.-based fund that invests in an array of large global gold miners matching the NYSE Arca Gold Miners Index. It has US$14-billion in AUM, an MER of 0.53 per cent and is up about 16 per cent so far this year and 68 per cent over the past year.
“In this environment and based on what’s happened in recent years, we do tend to prefer the gold mining companies,” Mr. Kletz says. His firm turns to U.S. ETFs because of their large size, low fees, strong liquidity and ease of trading.
If you’re buying gold as “apocalypse insurance,” there are a few investments you can redeem for physical gold ounces, Mr. Straus says. The U.S.-based VanEck Merk Gold ETF (OUNZ-A) tracks the price of spot gold and lets investors redeem their shares for gold in increments of one troy ounce. Its AUM is US$256-million with an MER of 0.4 per cent and a return of 12 per cent year-to-date and 32 per cent over the past year.
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