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This Is The Top Gold ETF For Market Risk Protection

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(Kitco News) - The desire for gold is the most universal and deeply rooted commercial instinct of the human race. – Gerald M. Loeb

A close look at historical price returns shows that history agrees with the age-old adage of holding gold as a hedge  but what is the best way to put this in practice?

The purest way for investors to play the yellow metal without buying outright physical gold bullions is to use gold-backed exchange-traded funds (ETFs), but not all ETFs are created equal.

The analysis shows that iShares Gold Trust (NYE: IAU) is the best option for investors looking to hedge equity exposure.

Variables For The Tests

In order for the comparisons to be consistent, parameters and assumptions were set as follows:

1) A “market correction” is defined as a fall in the S&P 500 of greater than, or equal to, 5%.

2) Only pure-play bullion ETFs are considered; no gold mining ETFs will be used.

3) ETFs must have ample liquidity, as defined by an active trading volume.

4) No leveraged ETFs are allowed.

5) Only long positions are considered (no put options, inverse, or bear ETFs).

6) There must be enough price history to cover at least three years of data (no recently incepted ETFs).

7) No ETFs using options based on other gold-backed ETFs (such is the case for GLDI).

Using’s online screener, the above parameters produced the following search results, ranked in order of assets under management (AUM):

Table 1

Testing The Performance

We then examined how each of these ETFs have performed during past market corrections, going as far back as the price data allows, which in this case, is late 2014 given that the youngest ETF on the list, OUNZ, was only incepted in May, 2014.

Table 2a gives a summary of the findings. There were a total of eight market corrections since 2014, with corrections of greater than 10% marked in red squares.

The performances of each of the gold ETFs during these periods are indicated on the right side of the table, with their median outperformance, as defined as the median returns of the ETFs minus the median returns of the S&P 500, circled in red at the bottom.

GLD and IAU are more or less tied in the median outperformance category.

Table 2a

As ETFs are managed by fund issuers, management fees must be considered, even if the funds themselves may be passively managed. The final step is then to compare the results by taking into account annual expenses for holding the fund.

Table 2b shows the funds’ median outperformance after deducting their latest expense ratios, since median fund returns in Table 2a do not consider annual fees.

Table 2b

Here, IAU is the winner, at 7.88% outperformance versus the S&P 500, edging slightly above GLD’s 7.74%.

Extending The Timeframe

What happens when we add in more price history? The next step of the test repeats the same process but uses data going back to the end of Q1 2009, when the S&P 500 has troughed from the recession. Because OUNZ and SGOL were not incepted until after 2009, they are excluded in this step of the analysis.

Table 3a

Table 3b

Since 2009, the S&P 500 recorded 24 periods of market corrections, of which six were greater than 10%, as indicated by the red boxes in Table 3a. In the same table, the yellow highlights showed periods of ETF underperformance; it only happened once during the May – June 2013 correction.

Table 3b shows ETF outperformance after fees.

Here again, IAU was the clear winner, beating out its rivals at 7.34% outperformance.

Concluding Observations

This analysis should not be interpreted as discouraging for all other gold ETFs. In fact, the tables above show that on an average basis, all the major gold ETFs have outperformed the market during periods of stock corrections.

Two important observations should be noted from the calculations done in this piece:

1) Gold does not hold a perfect inverse relationship to the market; investors should be aware that outperformance does not equate to positive returns in gold during market corrections.

2) Gold does not outperform the market during corrections 100% of the time, although on average, major gold ETFs yield between 7% to 8% outperformance during corrections, which is a great track record as a hedge instrument by any standard.

The final word is that despite GLD’s popularity and ubiquity amongst investors, as evidenced by its largest AUM in the market, its iShares competitor, IAU, beats it as a market hedge instrument, owing primarily to its slightly lower cost – 0.25% expense ratio for IAU versus 0.4% for GLD.

Disclaimer: the author is not an investment advisor and this article is not intended to issue investment advice.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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