These Aren’t Your Grandfather’s Gold ETFs

by on September 28, 2011 | ETFs Mentioned:

Few asset classes have delivered more impressive performances over the last several years than gold; investors seeking safe havens–or perhaps just fiat currency alternatives–have flocked to the yellow metal in droves in recent past, pushing asset prices sharply higher. And, not surprisingly, more and more investors seeking out precious metals exposure have elected to utilize ETFs in their pursuit. For a stretch in August, the Gold SPDR (GLD) was actually the largest ETF in the world, briefly surpassing the S&P 500 SPDR (SPY) with about $75 billion in AUM.

The most popular gold ETFs are simple, straightforward products–funds whose holdings consist of bars of gold bullion, and therefore have prices move in unison with changes in spot gold prices. There are no dividends to reinvest or index rebalancings to manage; gold ETFs efficiently mimic the investment experience associated with owning physical gold. So it is perhaps not too surprising to see more than $80 billion parked in the lineup of physical gold ETFs that also includes IAU, SGOL, and AGOL.

But there are certainly more ways to access gold beyond physically-backed ETFs such as GLD and IAU. Many investors have embraced stocks of companies engaged in the extraction and production of the metal as a preferred strategy for accessing the precious metal, preferring to utilize securities with associated cash flows. Beyond the ultra-popular Gold Miners ETF (GDX), there are now ETFs focusing on junior gold miners and gold exploration companies as well. And the options for accessing gold through the exchange-traded wrapper don’t stop there by any means, thanks to a number of relatively new products in the space[see ETF Research Report: Gold ETFs In Focus].

As the ETF industry has continued to evolve, issuers have rolled out increasingly sophisticated products across a number of asset classes. Innovation in the space has given investors a number of options for achieving various types of exposure to gold prices, including several more complex–and potentially intriguing–ETFs that we have highlighted below:

  • E-TRACS S&P 500 Gold Hedged ETN (SPGH): This one of a kind product tracks an index designed to give investors exposure to a basket of popular large cap stocks with a twist. SPGH’s underlying index will measure the performance of an investment strategy long the S&P 500 and hedged against fluctuations of the dollar relative to gold prices. The index does this by hedging beginning-of-period S&P 500 Total Return Index values with COMEX gold futures contracts [see SPGH Fact Sheet]. The Gold Hedged Index will outperform an unhedged S&P 500 when gold prices appreciate relative to the dollar and and underperform when gold depreciates.  From a year-to-date perspective, the S&P 500 has lost a little over 7%, while SPGH has posted a mirror image gain of a bit over 7% [see Large Cap ETFs: Studs And Duds]. Investors should keep in mind that this product is subject to the credit risk of the issuing institution, in this case UBS.
  • FactorShares 2x Gold Bull / S&P 500 Bear (FSG): Investors who are interested in gaining leveraged gold exposure with the manageable risk of a spread trading strategy need to look no further than FSG. This unique offering is designed to capture the spread between gold and large cap stocks on a daily basis; FSG maintains a long position in gold futures and a short position in E-mini futures of the S&P 500 [see FSG fact sheet]. Investors should note that FSG’s leverage resets on a daily basis, which results in compounding of returns when held for multiple periods. FSG is up 40% year-to-date, highlighting the potential powers of spread trading ETPs [see Q&A On Spread ETFs].
  • RBS Gold Trendpilot ETN (TBAR): This ETN gives investors gold exposure with a quantitative twist that results in a unique risk-return profile. TBAR’s underlying index utilizes a systematic trend-following strategy to provide exposure to either the price of gold or the yield on a hypothetical investment in 3-month U.S. Treasuries [see Five ETF Strategies For A Sideways Market]. TBAR invests in gold bullion when the price of gold closes above its 200-day simple moving average for at least five consecutive sessions. Meanwhile, when gold is below that threshold for five consecutive sessions, TBAR’s underlying index switches exposure to 3-month Treasury bills. TBAR also features a unique expense structure; when the index is invested in gold–as it is currently–expenses will be set at 1.0%. When the benchmark is invested in cash, however, expenses are cut in half to 0.50% [see TBAR Fact Sheet].

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Disclosure: No positions at time of writing.