Gold ETFs. Investments in gold for portfolio diversification

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During the crisis, demand for gold as a protective asset traditionally grows. Today let’s talk about how to optimally diversify your portfolio with gold investments.

You can invest in the yellow metal in different ways. It can be physical gold or impersonal metal accounts, mutual funds, ETFs or shares of gold mining companies. However, today we will consider the best option – index ETFs backed by real gold.

Specifics and profitability of investing in gold

Despite the fact that it itself does not produce anything and is a specific commodity, some investors buy gold to diversify their stock portfolios. The fact is that the yellow metal has an inverse correlation with stocks, as seen in the chart below, which reduces the volatility of the portfolio.

scale_1200 (4)S&P500 index and gold growth chart

Despite the fact that in certain periods you could make good money on the growth of gold (in the seventies and zero years), it is risky to bet only on the yellow metal.

After the peak in 1979, the price fell, and the recovery took as long as 20 years. Then a new cycle followed, and those who bought gold in 2011 are now at a loss.

Looking at a long historical perspective, gold’s yield is only slightly higher than inflation.

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Real annual return on inflation-adjusted indices.

Many professional investors, including Warren Buffett, avoid gold. In addition, today gold is not only a protective, but also a speculative instrument.

If gold for you is not gold bars in a safe or Switzerland “for a rainy day” (we can offer this service to our wealthy clients as well), but a tool for diversifying your investment portfolio, I recommend including 5-10% of gold ETFs in it.

Index ETFs in Gold

Exchange Traded Funds ETFs (Exchange Traded Funds) are a kind of “wrapper” and bring returns as close to the underlying asset as possible due to low fees. There is no VAT, no storage expenses, no spread between purchase and sale. As gold grows, so does the value of the gold ETF.

I recommend looking at two gold index ETFs – SPDR Gold Shares ETF (ticker GLD) and iShares Gold Trust ETF (ticker IAU).

The first is a real giant, the value of physical gold in the fund today is more than $57 billion, almost twice as much as that of iShares. But a share of the latter is cheaper – $16.5 versus $162.6 as of April 27, 2020.

 

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I personally like IAU better. The fund management fee is only 0.25% versus 0.40% of the GLD fund. At first glance it doesn’t seem like much, but over 10 years the difference in return reaches 2%.

This is another reason to compare any ETF by this parameter – the lower the management fee, the closer the fund is to the index and the greater may be the difference in returns of the funds in the long term.

There are also ETFs that include shares of gold mining companies. However, these are no longer investments in gold, but in business, which is also true for individual stocks. This means that an investor’s return is more dependent on the companies’ economic results than on changes in the price of the yellow metal.

Below is a comparative chart of the Gold Index Fund (IAU) and the ETF, which holds shares of 15 foreign gold mining companies (HUI). As we can see, investing in gold has been much more profitable than the companies that produce it.

 

scale_1200 (7)Since 2005, the gold mining stock ETF has brought in only 37%, and gold has brought in 290%.

 

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