Here’s How 4 Smart Beta Gold ETFs Are Performing

October 13, 2016

This has been a good year for gold ETF investors, who’ve piled into funds such as the SPDR Gold Trust (GLD)—the largest physical gold ETF in the world and 2016’s most popular ETF, with net creations exceeding $12 billion so far—and reaped nearly three times the returns of the S&P 500.

It has also been a good year for investors opting for some of the newer-to-market, smart-beta approaches to gold—ETFs that offer exposure that goes beyond physical gold, gold futures or even gold-related companies. But in this category, dispersion in returns is a good reminder of performance drivers and how deviating from simple exposures translate into sometimes-better, sometimes-worse results.  

The chart below shows the year-to-date performance of GLD relative to the SPDR S&P 500 (SPY):

Gold/Equity Hedged ETFs

In the ETF market, GLD is the behemoth choice for most investors, but there are some off-the-beaten-path gold strategies that are delivering some really interesting results.

Consider a pair of equity-hedged gold ETFs: the REX Gold Hedged S&P 500 (GHS), which offers long exposure to S&P 500 stocks and gold in one ETF wrapper; and the REX Gold Hedged FTSE Emerging Markets (GHE), which does the same as GHS but with emerging market stocks.

Both funds are actively managed and are still new to market, having launched only last April. They are also small. GHS has only $4 million in assets while GHE has $3 million.

But look at their performances since inception relative to GLD:

 

These ETFs invest in equity exposure via stocks or ETFs representative of the equity indexes incorporated into their benchmarks—the S&P 500 or the FTSE Emerging Index, respectively—and they use gold futures to create a gold hedge. In other words, the funds allocate a notional value to the gold exposure—the value of the leveraged position—that is equal to the value of the equity portion of the benchmark.

That means a $100 investment into GHS, for instance, equates to a $100 exposure to gold as well as $100 exposure to the stock index. That design essentially acts as leverage that can “magnify returns for better or worse” if the assets are trending together, according to ETF.com Analytics.

And that’s what we’ve seen happen this year. As U.S. and emerging market equities—as well as gold prices—have risen, so have the returns of these funds.  

Gold/Currency-Hedged ETFs

Investors can also own gold through gold ETFs that are long gold, short different currencies.

In the case of the AdvisorShares Gartman Gold/Yen ETF (GYEN), investors essentially own gold bought using yen instead of U.S. dollars. To achieve that, the fund shorts yen futures and holds a long position in gold futures or gold ETFs.

GYEN, which is an actively managed ETF launched in 2014, has $23 million in assets.

Similarly, the AdvisorShares Gartman Gold/EURO ETF (GEUR) is designed like GYEN but around euros. The fund has $25 million in assets.

The idea here is to own gold while mitigating some of the risks associated with a strong dollar—it’s for investors who want gold as a safe haven in their portfolios.

So far this year, both GYEN and GEUR have underperformed a simple allocation to GLD, as the chart below shows:

Charts courtesy of StockCharts.com

That underperformance has been particularly prominent in GYEN as the yen rallied while the dollar lost ground earlier this year. But in recent weeks, it’s the dollar that’s picking up some momentum while the yen recedes—an ongoing change that could bode well for GYEN investors.

When it comes to allocating to gold, ETF investors today have more than one choice—including these smart-beta ways of investing in the yellow metal that offer different results. For a complete guide of gold ETFs in the market today, check out our gold channel.

Contact Cinthia Murphy at [email protected]

 

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