One of the hottest market sectors this year has been gold. As of the close on May 5, the S&P/TSX Global Gold Index was up almost 20 per cent year-to-date.
Gold has been on a roll for the past several months despite rising interest rates, which normally are a headwind for the precious metal. The price has been fluctuating around US$2,000 an ounce and some experts predict it will continue to rise over the summer, due mainly to big purchases by central banks.
But most income-oriented investors aren’t participating in the gold surge. That’s because gold doesn’t pay interest or dividends. It just lies in a vault like a lump of inert metal (which it is). Not only does it not generate income, but it costs money to keep it safely stowed. Criminals are always happy to take it off owners’ hands, as we were reminded by the recent $20-million heist at Toronto’s Pearson Airport.
But financial engineers have devised a way to have your gold and live off it too. They’ve launched exchange-traded funds (ETFs) that invest in gold miners and generate income by selling covered call options against some or all of the portfolio. Investors who hold these ETFs are currently receiving attractive yields as well as capital gains. Here is a look at two Canadian-based entries. Prices are as of May 5.
CI Gold+ Giants Covered Call ETF
- Ticker: CGXF-T
- Type: Exchange-traded fund
- Price: $12.19
- Annual payout: $0.948 (trailing 12 months)
- Yield: 7.8 per cent
- Risk: High
- Website: https://funds.cifinancial.com/en/funds/daily-prices?ssf=CGXF
Comments: This ETF invests in a portfolio of at least 15 leading gold producers (as measured by market capitalization) listed on North American exchanges. About 59 per cent of the holdings are in Canadian stocks, with 13 per cent in the U.S. and 28 per cent international. Top holdings include Gold Fields Ltd., AngloGold Ashanti Ltd., Kinross Gold Corp. (K-T), Endeavour Mining Corp. (EDV-T) and B2Gold Corp. (BTO-T).
The managers write covered call options against the securities in the portfolio to generate income, which is paid to investors on a quarterly basis.
The ETF was launched in June 2011 and has about $167-million in assets under management. The management expense ratio (MER) is 0.71 per cent.
Recent performance has been impressive. The fund was up 31.8 per cent for the six months to the end of April. Based on the trailing 12-months distributions, the yield at the current price is 7.8 per cent.
But a word of caution. These results are outliers. The average annual compound rate of return since inception is negative1.8 per cent. In other words, if you bought units when they were launched, you’d be out of pocket right now – not by much, but still a loss. Over the past 10 years, the fund has made profits four times and lost money on six occasions.
Horizon Gold Producer Equity Covered Call ETF
- Ticker: GLCC-T
- Type: Exchange-traded fund
- Price: $28.41
- Annual payout: $2.533 (trailing 12 months)
- Yield: 8.9 per cent
- Risk: High
- Website: https://horizonsetfs.com/ETF/glcc/
Comments: The principle here is the same. The fund holds a portfolio of top gold producers and actively writes covered call options against them. The top names are somewhat different from those in CGXF, however, and include Agnico Eagle Mines Ltd. (AEM-T), Barrick Gold Corp. (ABX-T), Franco-Nevada Corp. (FNV-T), and Newmont Corp. (NGT-T).
Like CGXF, this fund was also launched in 2011, but it’s been more successful in attracting investor interest, with $261-million in assets under management. The MER is 0.79 per cent. This fund makes distributions monthly, currently at a rate of $0.22 a unit.
The patterns between these two funds are similar. Both have been strong recently – this one was up 34.09 per cent in the six months to April 30. But the average annual compound rate of return since inception is negative 1.37 per cent.
In short, neither of these funds should be considered a long-term hold. They are only suitable for opportunistic investors, who can tolerate risk and are prepared to sell quickly if gold prices turn down.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe