When gold glitters, it can take investors by surprise. It took on a new shine in the last quarter of 2018 when it outperformed U.S. stocks amid market volatility. Gold in New York gained 7.5 per cent compared with a 13.5-per-cent loss for the S&P 500 index, including dividends.
While the price of gold is unpredictable, owning it can help diversify a portfolio because it can move opposite to the direction of stock markets. Instead of buying bullion or gold-mining stocks – which can have some weak correlation to the market – exchange-traded funds (ETFs) offer easier exposure to the asset.
Also, fees for gold bullion ETFs are reasonable compared with the costs of storing and insuring gold bars. And gold-equity ETFs can be less risky than trying to pick individual stocks.
Three ETF experts provide their top picks in the precious metals sector.
Daniel Straus, head of ETF research and strategy, National Bank Financial Inc., Toronto
Management expense ratio (MER): Estimate of 0.23 per cent
This relatively new pure-gold bullion ETF, which is the cheapest in Canada, may appeal to investors seeking a short-term safety trade when equity markets sell off, says Mr. Strauss. But it can also be a portfolio diversifier or an inflation hedge, or used as a speculative play on the commodity price, he adds. This ETF holds gold bars in a vault at the Royal Canadian Mint, where the bullion is stored in the fund’s name and held separately from other client holdings. Investors, however, can sell their ETF units for bullion if they meet the minimum one-kilogram redemption requirement, he adds. This Canadian-dollar, unhedged version of the ETF could benefit investors when the U.S. dollar rises against the loonie, he says. But if the price of gold falls at the same time as the U.S. greenback is declining against the Canadian dollar, investors will face a “double whammy of losses,” he says.
MER: 0.66 per cent
With more than $5-million in assets, this global equity ETF is small, but the appeal is in its methodology, which aims to avoid overconcentration in a few gold miners, says Mr. Straus. That can be the case with ETFs based on a market-value strategy. This ETF, which screens stocks using criteria such as valuation, profitability and efficiency, emphasizes royalty and streaming companies (providers of capital to fund gold exploration and production projects) over traditional producers, he notes. Top holdings include Wheaton Precious Metals Corp., Royal Gold Inc. and Franco-Nevada Corp. Since its 2017 launch to the end of February, 2019, the ETF has earned an 8.35-per-cent total return compared with losses for its Canadian-listed peers, he notes. Gold price volatility is a risk, as is an uncertain future if the ETF’s assets under management don’t grow, he says. The ETF’s fee is in line with those of its peers, he adds.
David Kletz, ETF analyst and portfolio manager, Forstrong Global Asset Management Inc., Toronto
MER: 0.60 per cent
This bullion ETF may appeal to investors seeking diversification because it owns gold, silver, platinum and palladium, says Mr. Kletz. The non-gold holdings, which are used in manufacturing applications, add an industrial tilt and complement the traditional, safe-haven attribute that gold possesses, he adds. The bullion is stored in a vault with J.P. Morgan Chase Bank in London, but investors can’t redeem units for the physical metals. Because platinum and palladium are used in automobile catalytic converters, falling demand for traditional vehicles, due to rising electric car sales and auto-catalyst recycling, is a risk, he says. And palladium, whose price has surged since mid-2018 due to tight supply, could be vulnerable to a correction. This ETF, whose fee is higher than those of its North American gold-bullion ETF peers, would likely underperform those same peers in a recession, he adds.
MER: 0.39 per cent
This gold-equity ETF, the cheapest among its North American peers, should benefit from miners reining in costs and a potential rising underlying commodity price, says Mr. Kletz. As most major gold mining companies focus on tightening capital expenditures and improving operational efficiencies, their all-in sustaining cost (AISC) is comfortably below the US$1,000-an-ounce level, he notes. That should help profitability for a while, as gold’s recent price is around US$1,300, he adds. “Should the price of gold continue to rise, miners’ profits would increase by a greater percentage, assuming that their costs remain relatively constant,” he adds. While Newmont Mining Corp. and Barrick Gold Corp. make up almost 30 per cent of the ETF, the overconcentration risk from a possible merger would be partly mitigated by the fact that holdings are capped at 25 per cent, he says.
James Gauthier, head of ETF and mutual fund research, Industrial Alliance Securities Inc., Toronto
The pick: GraniteShares Gold Trust ETF (BAR-NYSE)
MER: 0.17 per cent
This bullion ETF provides easy exposure to gold, but is also the cheapest among its North-American-listed peers, says Mr. Gauthier. New York-based GraniteShares LLC launched this ETF in August 2018 to be the least expensive gold-bullion fund on the market with a 0.20-per-cent MER. The company later reduced the fee further to maintain a cost-leader position after Boston-based State Street Global Advisors and the World Gold Council launched SPDR Gold MiniShares Trust ETF (GLDM-NYSE) with a lower 0.18-per-cent fee. The gold bars in the Graniteshares’ ETF are stored in a London-based vault operated by ICBC Standard Bank PLC, but investors do not have the ability to redeem ETF units for physical gold, he says. “It is up to the individual to determine if that feature is desirable.” The unpredictable price of gold is the big risk to this fund, he adds.
MER: 0.61 per cent
This global equity ETF gives the same weighting to large and smaller gold-mining companies so that the result is a “more balanced portfolio,” says Mr. Gauthier. “Equal weighting avoids the concentration risk that can come with narrow sectors like gold.” For example, 40 per cent of iShares S&P/TSX Global Gold ETF (XGD-TSX) is in Barrick Gold Corp., Newmont Mining Corp. and Franco-Nevada Corp. The weighting in the BMO ETF, however, can float until a rebalancing occurs each March and September. Although this fund owns mainly Canadian gold miners, it also offers exposure to companies from the United States, South Africa and Australia. Withholding taxes can be an issue for Canadian-listed ETFs that hold foreign names, but they would be minimal because gold producers are generally not big dividend payers, he says. The ETF’s fee is fair compared with its peers, he adds.