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.