Contributed Commentaries
Feeling nervous about interest rates? Here’s five gold ETFs to fill your portfolio
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
During the “heyday” of near sub-zero interest rates, investors tend to flood the equities market, that's until economic turbulence begins to shake up market volatility, causing investors to jump ship and swim towards saver, and more resistant investment options.
Typically, commodities are one of the first, strong options for many investors, especially during periods of inflationary pressure, eating away at the buying power of currencies, and interest rates steadily rising to counterbalance economic agitation.
Since early March 2022, the U.S. central bank has embarked on an inflation-busting spree, raising interest rates for 11 consecutive times, and while Feds have paused recent hikes, officials close to the matter claim that at least one more potential interest rate hike is still on the cards for this year.
Soaring interest rates have thrown a spanner in the works for many investors, leading many to seek out potential safe havens as they navigate the challenging volatile market conditions. With Feds looking to further bump up rates, as they desperately look to bring core inflation down to its 2% mark, seasoned investors are now desperately looking towards alternatives to hedge possible economic turbulence.
Why invest in gold ETFs?
While top investors continue to flirt with the idea of investing in more gold-focused companies and stocks, for novice and less-experienced investors, gold ETFs provide minimal risk exposure and adequate access to gold bullion, and equities and are a safer near-term option.
At its most basic, and perhaps primary elevation, gold ETFs are divided into two different categories, these being ETFs that own physical gold, and ETFs that own gold mining stocks.
Having to choose between these two categories allows investors the ability to evenly diversify their portfolios, without adding too much risk exposure. Additionally, fund performance won't necessarily be as heavily impacted by market fluctuations, as gold funds would have more weighted options to provide maximum performance against minimal risk.
Seasoned professionals will need to prioritize both categories, as this would help provide them with increased market leverage for yellow metal. On top of this, investors need to consider how various ends of the supply chain, including mining, production, and manufacturing, or consumer demand could change over the coming months as prices remain highly volatile, and analysts predict persistent economic slowdown.
Tapping the gold commodity market remains a rather difficult landscape to navigate, however, and now with many looking to safeguard their portfolios against rising rates and sticky inflation, ETFs are proving more rewarding than what many had originally anticipated.
It's perhaps interesting to keep in mind that as other industries, such as consumer luxury goods and technology, among others evolve, we'll begin to notice similar growth demand taking shape in the gold mining sector. Already today, gold mining, and more importantly, gold, experiences a broad range of industrial applications.
The World Gold Council estimates that the technology sector is currently the biggest driver of demand for gold as an industrial metal, accounting for +/-80% of gold used in technology. Gold is also seeing applications in other technological advancements such as in the automotive industry.
Traditional investors had in the past shrugged at the idea of investing in gold ETFs, as many argued that these funds provided less capital return over the near term. However, challenging macroeconomic conditions have meant that gold ETFs are often a lot less riskier, but more importantly, can still provide investors with the exposure to the yellow metal they strongly desire.
Top gold ETFs
Having increased liquidity, and indirect exposure to gold mining companies, these are some of the top gold ETFs investors are going after this year, as they look to hedge against stock market volatility.
SPDR Gold Shares
Considered to be one of the biggest, and perhaps most notable gold trusts on the market, the SPDR Gold Shares Trust (NYSEARCA: GLD) is currently one of the biggest holders of physical gold, with bars stored at HSBC, London, and JPMorgan, New York City.
The GLD remains one of the best possible ways for investors to have maximum exposure to spot gold, without having to physically purchase any gold bars. Looking at their current inventory, the SPDR Gold Shares Trust has roughly 855.45 tonnes of gold or over 27.5 million ounces.
Inventory estimates are updated each weekday, and tend to rollover, or change as demand fluctuates. Nonetheless, based on current inventory, against the price of spot gold, GLD has roughly more than $53 billion in assets under management (AUM). This makes it not only one of the biggest funds of its kind but also the only one currently holding this much physical gold.
Over on the stock market, GLD remains relatively steady, after seeing prices tumble just under 5% during the final trading week of September. However, GLD has managed to regain its footing again and has climbed by more than 5.14% during the first two trading weeks of October. Investors are seemingly bullish over GLD and remain hopeful that prices could soon swing towards their peak in July when prices hit $190.44 per share.
iShares Gold Strategy ETF
While smaller, and perhaps not having nearly as much AUM as compared to the SPDR Gold Shares fund, the iShares Gold Strategy ETF (IAUF) provides investors with diversified access to gold equities and treasury bills.
Seeing that the majority of the fund isn't only dedicated to gold, investors typically leverage IAUF to further increase their overall portfolio diversification, while still managing to lower their risk appetite.
One of the most notable trademarks of IAUF is its low fund management fees, which currently sit at 0.25%, while the fund holds an expense ratio of 0.34%. Easier access to broader, and more diverse assets, combined with affordable fund management costs have kept novice investors within arms reach.
Despite being weighted more towards cash assets such as treasury bills and providing more liquid exposure to gold equities, IAUF reports a 5.38% year-to-date performance increase. The fund closely tracks the Bloomberg Composite Gold Index as its benchmark and has closely mirrored this performance for the majority of years since the fund's inception back in 2018.
iShares Gold Trust
The next fund is relatively similar to the previous, however, the iShares Gold Trust (NYSEARCA: IAU) provides investors direct exposure to the daily price movement of gold bullion and is often considered a more cost-effective alternative to access physical gold.
IAU closely tracks the performance of gold bullion and helps to create a more diversified option for investors seeking to hedge inflation - similar to other gold ETFs - and seeking better, and less riskier exposure to the yellow metal.
As of October 2023, IAU had more than $25 billion in AUM, with roughly 406.51 tonnes or more than 13 million ounces of gold in its inventory. Based on the most recent market performance, IAU has managed to outlive tumultuous market volatility, to remain on top, with a 4.19% year-to-date performance improvement.
One of the most notable characteristics of IAU is that it provides smaller, and less serious investors with access to physical gold, seeing as average prices for IAU are currently trading under $40 per share.
VanEck Gold Miners ETF
Investors seeking increased exposure to gold mining companies often rely on the VanEck Gold Miners ETF (NYSEARCA: GDX), as the top 10 holdings of the fund are purely dedicated to a diverse selection of some of the world's biggest gold mining companies.
The top holdings of the fund include Newmont Corporation (NYSE: NEM), Franco-Nevada (NYSE: FNV), and Barrick Gold (NYSE: GOLD). One of the key characteristics of the fund is to ensure that investors, both seasoned professionals and novice investors have as much exposure to the best-performing gold mining companies while minimizing potential volatility within the overall fund.
One of the key drawbacks of GDX is that the fund has an expense ratio of 0.53%, which is slightly higher than other contenders on our list. This often makes the fund more attractive to long-standing, successful investors, however, it goes without saying that GDX provides an incredibly diverse portfolio.
As of October 2023, GDX had roughly $724.1 million in assets under management. Based on the most recent stock market indicators, GDX had experienced a relatively slow year on the stock market, with GDX shares dropping 2.23% year to date.
The slow performance could be a reflection of the broader market, and gold industry which have had a somewhat challenging time navigating higher interest rates, inflation, and supply chain constraints.
SPDR Gold MiniShares Trust
Another suitable option for investors feeling relatively nervous about the current interest environment is the SPDR Gold MiniShares Trust ETF (NYSEARCA: GLDM), a fund created by the same investment managers of the SPDR Gold Shares Trust.
The overall aim of GLDM is to create a more cost-effective gold ETF that provides institutional investors with less risk exposure to fluctuating markets. Overall, the fund holds mostly gold bullion and indicates that from time to time it dedicates some of its holdings to cash.
GLDM provides exposure to the yellow metal, with just over 94 tonnes or more than 3 million ounces of gold currently in its inventory. Compared to its larger predecessor, SPDR Gold Shares, the fund has an expense ratio of 0.10%, making it one of the most cost-effective ways for investors to directly invest in gold, and create more diversification in their portfolios.
So far this year, share performance has remained steady, with year-to-date prices increasing about 4.86%. Similar to GLD, prices of GLDM slipped during the last two trading weeks of September, with performance falling roughly 5.31%. Since then, prices have stabilized, and have already climbed back up again by 5.95%.
Finishing thoughts
While investors, and perhaps the greater Wall Street remain uncertain about the direction the Federal Reserve will be moving in the coming weeks, the yellow metal is currently having its moment in the sun, with investors nervous, and looking towards commodities to help hedge inflation, and beat down the tight interest rate environment.
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