The Most Interesting New Gold ETF Since GLD

As well as the stock market has been performing recently, many investors are hedging their bets. That's based on flows into physically backed gold ETFs, which ticked into positive territory last week for the first time in 2017.

Year-to-date, the two largest ETFs in the category―the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU)―now have combined inflows of nearly $1 billion. That comes on top of the more than $9 billion worth of inflows the duo saw last year.

Fund Flows Data

Source: ETF.com Fund Flows tool, powered by FactSet

Despite these sizable flows, gold prices haven't seen the bump one might expect. Though they've risen last year and so far this year, the yellow metal is still down 36% from its all-time highs set in 2011.

There's a few reasons for this, but one of the biggest is the U.S. dollar, which is close to a 14-year high. A "rule of thumb" for gold that often rings true is that a rising greenback is bearish for the yellow metal.

That poses a conundrum for U.S. investors. On the one hand they may be eager to use gold as a hedge against all manner of concerns. On the other hand, the greenback is in a secular uptrend that's quashing any attempts by gold prices to rally.

Solving Gold's Dollar Problem

Enter the SPDR Long Dollar Gold Trust (GLDW), the latest collaboration between State Street and the World Gold Council. GLDW is only the second ETF in the SPDR Gold Shares family, along with the aforementioned GLD.

Thanks to the strength of the brand, GLDW has been able to accumulate $15 million in assets in the three weeks since its launch (a respectable take, though nowhere near the record-shattering $1.5 billion GLD brought in during its first few weeks on the market back in 2004).

GLDW attempts to solve gold's dollar problem by taking a long position in the buck on top of an underlying long position in physical bullion. If the dollar rises, the ETF's currency position helps offset any potential losses in gold that may result.  

As the issuer website says, another way of looking at it is that GLDW gives investors exposure to gold as if "they had purchased it using a basket of six, non-US dollar currencies." Those six currencies are the same ones in the U.S. Dollar Index: the euro (EUR), Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Swedish krona (SEK) and the Swiss franc (CHF).

Not The First Of Its Kind

GLDW isn't the first ETF to have this "gold denominated in foreign currencies" theme. The AdvisorShares Gartman Gold/Yen ETF (GYEN) and the AdvisorShares Gartman Gold/EURO ETF (GEUR), both launched in 2014, are two funds that apply a similar strategy. However, GYEN and GEUR go long the dollar against only the yen and euro, respectively. GLDW is the first to use a basket of currencies for its long-dollar exposure. 

In the three years since their launch, the AdvisorShares products haven't gained that much traction. They have a combined $35 million in assets under management currently. Perhaps GLDW's name recognition will help it become more successful.

Indeed, from a performance perspective, there's certainly reason for investors to take a closer look at these types of products. Since their inception in February 2014―just a few months before the dollar bull market began in earnest―GYEN gained 3%, while GEUR gained 18.8%, compared with a loss of 5.7% for GLD in the same time frame.

Of course, GLDW wasn't around back then. But its underlying index, the Solactive GLD Long Dollar Gold Index, would have gained 21.1% in the period, according to backtested data. Moreover, using the same backtested data, the Solactive index is only down 12.5% from what would be its 2011 all-time high, much less than the 37% for GLD.

Returns For GLD, GEUR, GYEN, Solactive GLD Long Dollar Gold Index Since February 2014

Risks To Consider

GLDW is a solid offering that's poised to outperform vanilla gold ETFs like GLD and IAU should the dollar continue to rally. Of course, the flip side rings true as well; if the dollar declines, that would cause GLDW to underperform.

Investors should also be mindful that in the future, the cost of carry may become a consideration. Currently, foreign currencies in the Dollar Index basket are yielding less than the U.S. dollar, resulting in a slightly positive yield. If the situation reverses, the negative carry will become a drag on the returns for the fund.

At the time of writing, the author did not own any of the securities mentioned. Contact Sumit Roy at [email protected].