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Invest in This Gold ETF for Income & Go Beyond Conventionalism

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Sanghamitra Saha
·3 min read
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Gold is normally disliked by a section of investors because the asset is non-interest bearing. In the current scenario where rates are rising thanks to growing vaccine distribution and hefty stimulus under Biden's administration, gold investing has fallen short even more.

With the coronavirus fear ebbing slowly, global rates should be increasing in the coming days. So, gold’s demand will likely fall as it normally lacks any income matter. To avoid such issues, First Trust recently launched First Trust Cboe Vest Gold Strategy Target Income ETF IGLD.

Inside IGLD

The fund holds a portfolio of flexible exchange (FLEX) options on the SPDR Gold Trust (GLD) along with short-term Treasuries and cash-like assets in an effort to gain exposure to the performance of gold while generating income. IGLD charges 85 bps in fees.

The fund looks to offer price returns of GLD while providing a consistent level of income through a portfolio substantially composed of short-term U.S. Treasury securities, cash and cash equivalents, and some other instruments. 

IGLD buys call options and sells put options on GLD to get exposure to the underlying ETF’s performance. It also looks to generate income 3.85% higher than the annual yield offered by one-month Treasuries by deploying a partial covered call options strategy on GLD that provides premiums, according to the prospectus, as quoted on etf.com.

Hence, the strategy is less of capital gains/losses from GLD but more of yield generation through the covered call strategy. "Historically, gold has been an important tool for many investment advisors seeking to enhance diversification within their clients’ investment portfolios, while also providing a potential hedge against inflation. We believe this ETF will be useful not only for pursuing those objectives, but also as an income strategy," said First Trust ETF Strategist Ryan Issakainen, as quoted on etf.com.

Any Competition?

IGLD is the first ETF based on gold to employ Cboe Vest’s Target Income Strategy, per the press release. However, while most gold ETFs in the space like GLD, iShares Gold Trust IAU, Invesco DB Gold Fund DGL and Aberdeen Standard Physical Gold Shares ETF SGOL are not known for current income, there is one product, namely iShares Gold Strategy ETF IAUF, which emerges as a yield generator and can pose a threat to the newbie IGLD.

The IAUF is active and does not track a benchmark. The fund seeks to track the investment results of the Bloomberg Composite Gold Index, which is designed to track the price performance of gold. The Underlying Index comprises exchange-traded gold futures contracts and one or more ETPs backed by or linked to physical gold.

The fund also looks to generate interest income and capital appreciation through a cash management strategy consisting primarily of cash and cash equivalents and short-term government obligations. The fund charges 25 bps in fees and yields 8.39% annually.

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SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
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