This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Mike Venuto, co-founder and chief investment officer of New York-based Toroso Investments.
Gold may be the most controversial hard commodity investment available in today’s marketplace.
It’s important to remember that a little over a decade ago, purchasing this asset in an investment account was very difficult. In November 2004, the SPDR Gold Shares (GLD | A-100) was launched, and for the first time, investors could easily allocate directly to gold.
The merits of a gold position in a portfolio in today’s uncertain market are obviously debatable. However, investors that choose exposure to gold have many new opportunities to tilt and possibly enhance this exposure. These tilts are similar to how “smart beta” equity strategies enrich the exposures of traditional market-cap-weighted products.
The Gold Standard Or Beta
GLD has more than $24 billion in assets and is the primary way ETF investors choose to participate in gold. The closest competitor is the iShares Gold Trust (IAU | A-99), with $5.8 billion in assets. These products are extremely similar, although IAU has an expense ratio that is 0.15 basis points cheaper, at 0.25 percent.
There is a surprising disparity in assets despite the substantial discount in IAU’s fee. I believe this is due to investors’ desire to use GLD tactically.
The World Gold Council has published research noting that liquidity and securities-lending policies of GLD have historically made up for the difference in expense ratio, when compared with IAU. In the end, both GLD and IAU provide simple, clear exposure to gold.
Investment Or Collectable?
For tax purposes, owning gold is treated as a collectable. This affects investors in different ways, but creates substantial problems for mutual funds and ETFs that invest in GLD or IAU. The details are complicated, but the end result is a risk most fund managers will not accept.
The best example comes from the management of the SPDR SSGA Multi-Asset Real Return ETF (RLY | D-31). SSGA is the manager of RLY and the sponsor of GLD. SSGA does not purchase GLD in RLY; instead, it uses thePowerShares DB Gold Fund (DGL), which seeks exposure to gold through futures.
Unfortunately, the use of futures to express gold has a cost; which has caused underperformance. Since inception in 2007, DGL has had a total return of 56 percent versus GLD’s 82 percent for the same time period.
In the Toroso Newfound Tactical Allocation Fund (TNTNX, TNTAX, TNTCX), I use the Etracs CMCI Gold Total Return ETN (UBG | C-58) to express our core gold exposure. There are some liquidity constraints to this product, but as an ETN, it is viewed as a debt instrument instead of as a collectable.
Outside of speculation, exposure to gold is usually employed to hedge inflation or as a flight to safety. During long bull market cycles where inflation is muted, gold can be a huge drag on portfolio performance.
The Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI | D-44) offers a way to maintain gold exposure while synthetically creating income though options. I prefer to use this ETN as a complement to core gold exposure rather than a full replacement. GLDI can mute the negative returns of gold and produce income in sideways markets, but the buy-write process may limit the upside during rapid gold rallies.
Gold Without Dollars
The hottest trend in equity ETF investing over the past few years has been currency hedging. AdvisorShares, in partnership with Dennis Gartman, manages two ETFs that are long gold and short either the euro or the yen. TheAdvisorShares Gartman Gold/Euro ETF (GEUR | D-28) and the AdvisorShares Gartman Gold/Yen ETF (GYEN | D-26) are both actively managed ways to access gold while limiting the negative impacts of the strong dollar.
These ETFs are actually quite passive in their exposure, but the active wrapper is used to allow for proper execution of the currency futures trades. These ETFs are great enhancers if investors are using gold as a safety trade in a weak equity market where the U.S. dollar rallies.
My core investment philosophy is based on the “all weather” or “permanent portfolio” asset allocation. This requires that, at all times, we maintain exposure to four dominant economic conditions: prosperity, recession, inflation and deflation.
Gold is our core exposure or hedge for inflation. The advent of new and exciting innovations in ETFs allows me to enhance this position with substantially more precision.
ETFs continue to democratize assets classes through access, and enhance them through tilts and structures. Other investors looking to own gold for speculation, hedging or other reasons now have access that may be superior through smart-beta versions.
At the time of this writing, Toroso had positions in GLD, GLDI, GEUR, GYEN, UBG and TNTNX. Toroso is affiliated with Global X Management Company. Toroso is a New York-based investment advisor focused on researching ETFs and other exchange-traded products, and designing asset allocation strategies, using ETFs that seek to perform well in various economic climates while emphasizing future objectives over past correlations. For more information about Toroso, call 646-465-5930, visit www.torosoinv.com or firstname.lastname@example.org. For a list of relevant disclosures, please click here.