BY: MARK NOBLE, SENIOR VICE-PRESIDENT, ETF STRATEGY, HORIZONS ETFS
July 9, 2019
Gold and Gold equities have come back in favour in a big way so far in 2019 due to increased concerns about the global economic uncertainty and a worldwide deflationary environment. Gold is primarily used as a physical store of value. Therefore, when interest rates fall (which is often a direct result of a declining economic growth), Gold has historically tended to perform well. For instance, U.S. Treasuries and Gold were the primary beneficiaries of the last global economic crisis, so any hint of recession or a slowdown tends to send Gold prices up.
This year, the run-up in Gold has been the strongest in quite a few years, as illustrated in the chart below. Physical gold prices, as represented by the SPDR Gold Trust ETF (GLD), are up 9.72% year-to-date, and Gold Equities, as represented by the S&P/TSX Global Gold Index (in U.S. dollars), are up 23.59% year-to-date (as at June 28, 2019). Gold Equities tend to move with leverage vs. Gold prices – meaning they decline more than Gold when there is a pullback in Gold prices and increase more when Gold prices are rising. Also plotted on the chart is the 5-year U.S. Treasury yield, to show the severity of the decline in interest rates -29.66% year-to-date. I believe that this more, than any other reason, has driven the movement towards Gold and will likely fuel interest in other hard assets such as real estate. Notice the near perfect inverse correlation between interest rates and Gold.
Source: Bloomberg, from June 30 2009 to June 28, 2019.
The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. The ETF is not guaranteed, its values change frequently, and past performance may not be repeated. The indices are not directly investible.
FOUR WAYS TO INVEST IN GOLD
Investors looking to add some Gold exposure to their portfolios can do so through a variety of ways within the Horizons ETFs family. Horizons ETFs was an early mover globally on commodity-focused ETFs and has arguably the most robust suite of gold-focused ETFs in Canada – all of which have track records in excess of five years. Investors with a deflationary outlook could consider Gold for their portfolio as a performance hedge.
Horizons Gold ETF (HUG): HUG is one of only two ETFs in Canada that provides direct exposure to the spot-price of Gold, by investing in the front-month Gold Futures contracts and hedges the U.S. dollar exposure of the futures. Unlike other commodity futures contracts, Gold Futures have nearly a negligible amount of cost associated with rolling them, since they track the spot-price of Gold very closely. The only other ETF that tracks the price of Gold is the iShares Gold Bullion ETF (CGL), which holds physical gold certificates. As at June 28, 2019, the year to date, performance of the two ETFs has been nearly identical, 8.96% and 8.77% respectively.
Horizons Gold Yield ETF (HGY): One of the drawbacks of investing in Gold is that it doesn’t pay an income. HGY addresses this issue by using an innovative covered call strategy on Gold Futures to allow investors to have direct exposure to the spot price of gold bullion while generating a monthly income. HGY has two-thirds of the portfolio invested long in the physical price of Gold by holding physical Gold ETFs. Then, a dynamic actively managed covered call strategy is written on one-third of the portfolio to generate income. Because the underlying volatility of Gold can be relatively high, the yield on HGY can be quite attractive – currently at approximately 4.50% annualized. With HGY, an investor could get two-thirds of the movement of Gold, but then clip a yield of 4.5%, which is a nice cushion if bullion doesn’t move or declines from there. However, the call usually can limit upside potential if Gold experiences a strong rally.
Horizons Enhanced Gold Producers ETF (HEP): Amongst our largest covered call ETFs, HEP uses an innovative covered call strategy, that writes monthly, out-of-the-money calls on a portfolio of roughly 12 to 13 equal-weighted gold producer stocks. As mentioned earlier, this sector has been on a tear this year, with a year-to-date total return of 23.59% as at June 28, 2019, according to Bloomberg. What makes this additionally attractive is the fact that HEP pays a monthly distribution. The yield as of June 28th, 2019 is 5.25% annualized. Again, in a low-interest rate environment, HEP provides the potential of a double-barreled benefit of having strong price returns from the movement of the Gold equity sector and also pays a high yield, in an environment where yields are on the decline. As with all covered call ETFs, there is the possibility of limited upside potential should the sector experience a strong or an extended rally.
|1 Month||3 Month||6 Month||YTD||1 Year||3 Year||5 Year||Since Inception||Yield|
|GLD US EQUITY||8.73%||8.66%||9.72%||9.72%||12.23%||1.77%||0.99%||7.82%||—|
|HUG CN EQUITY||7.80%||8.46%||8.96%||8.96%||10.00%||-0.31%||-0.85%||2.19%||—|
|CGL CN EQUITY||8.44%||8.17%||8.77%||8.77%||10.95%||0.83%||0.25%||2.34%||—|
|HGY CN EQUITY||5.67%||6.41%||6.82%||6.82%||8.02%||-0.77%||-1.08%||-2.46%||4.47%|
|HEP CN EQUITY||12.27%||9.34%||17.56%||17.56%||16.72%||-0.85%||3.79%||-5.71%||5.21%|
|SPTSGD INDEX (USD)||19.74%||15.51%||23.59%||23.59%||16.87%||-3.87%||-0.85%||5.97%||—|
Source: Bloomberg, as at June 28, 2019
The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible.
SPDR Gold Trust ETF (GLD): The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses.
iShares Gold Bullion ETF (CGL): Seeks to replicate the performance of the price of gold bullion, less fees and expenses.
Horizons Gold ETF (HUG): Seeks investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to the performance of the Solactive Gold Front Month MD Rolling Futures Index ER. Any U.S. dollar gains or losses as a result of the ETF’s investment will be hedged back to the Canadian dollar to the best of the ETF’s ability.
Horizons Gold Yield ETF (HGY): Seeks to provide Unitholders with: (i) exposure to the price of gold bullion hedged to the Canadian dollar, less the ETF’s fees and expenses; and (ii) tax-efficient monthly distributions, and (iii) in order to mitigate downside risk and generate income, exposure to a covered call option strategy on 33% of the securities of the Gold Portfolio. The level of covered call option writing to which Horizons HGY is exposed may vary based on market volatility and other factors.
Horizons Enhanced Gold Producers ETF (HEP): Seeks to provide Unitholders with: (a) exposure to the performance of an equal weighted portfolio of North American listed gold mining and exploration companies; and (b) monthly distributions of dividend and call option income. Horizons HEP will invest primarily in a portfolio of equity and equity related securities of North American listed companies that are primarily exposed to gold mining and exploration and that, as at the Constituent Reset Date, are amongst the largest and most liquid issuers in their sector. Horizons HEP will rebalance, on an equal weight basis, the portfolio of constituent securities on each Constituent Reset Date. To mitigate downside risk and generate income, Horizons HEP will generally write covered call options on 100% of the portfolio securities. The level of covered call option writing may vary based on market volatility and other factors. Any foreign currency gains or losses as a result of Horizons HEP’s investment in non-Canadian issuers will be hedged back to the Canadian dollar to the best of its ability.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.