Below, I list my top 3 gold ETFs in Australia and make the case for it in a diverse portfolio.
2020 & gold
The importance of gold within a diversified portfolio was highlighted in March 2020 when asset classes such as bonds and equities fell rapidly while gold held its value.
I think gold is an effective method of reducing risk within a portfolio given its low correlation with other asset classes. Furthermore, gold acts as a hedge against cy devaluation. This is especially relevant given money printing by central banks around the globe.
While investors could opt to store gold bars underneath their mattress (or in a safe), a far more effective way of gaining exposure is to hold a gold ETF.
Here are the top three ETF’s for exposure to the gold price.
ETF Securities GOLD ETF (ASX: GOLD)
GOLD offers a simple and cost-effective option for investors to access physical gold and movements in the gold spot price. It is the largest and most liquid gold ETF on the Australian market with $2.18 billion funds under management.
The ETF is denominated in US Dollars, meaning investors are subject to movements in both the spot gold price and AUD relative to the USD. As a result, investors will benefit from a rising AUD. Conversely, a falling AUD will reduce performance.
Featured podcast: understanding the GOLD ETF
The gold owned by the GOLD ETF is backed by physical bullion held in the vaults of JPMorgan in London, with each bar segregated, individually identified, and allocated. Physical holdings can be redeemed, meaning investors are entitled to delivery of the gold bullion upon redemption of their units. The GOLD fund has returned 10% year-to-date, with a five-year return of 9.85% per annum. The 0.40% management fee accounts for storage costs, transportation, and administration.
Betashares Gold Bullion ETF – Currency Hedged (ASX: QAU)
Similar to GOLD, QAU offers investors exposure to the gold price backed by gold bullion bars held by JP Morgan. However, there are two major differences between QAU and GOLD.
The first difference is QAU is cy hedged against movements in the AUD/USD exchange rate. This means fluctuations in either cy will not affect the overall return of the ETF, thus eliminating cy risk. As a result of the cy hedging, the second difference is management fees. QAU management fee is 0.59%, compared to 0.40% for GOLD, perhaps to account for the cost of hedging.
QAU has returned 8.68% per annum over a five-year period, 1.17% (117 basis points) less than GOLD.
Ultimately, the decision between QAU and GOLD rests on your perspective of exchange rate movements. If you want a pure-play on the gold spot price, QAU will remove the cy risk, albeit with a marginal increase in management fees. Conversely, if you have on view on cy movements, or apathetic to foreign exchange, GOLD is more appropriate.
VanEck Vectors Gold Miners ETF (ASX: GDX)
GDX provides an alternative method of gaining exposure to gold by investing in the shares of a global basket of gold mining companies. The fund follows the NYSE Arca Gold Miners Index with approximately 50 holdings. Fund holdings are primarily located in Canada (54.1%), United States (16.9%), and Australia (14.7%). The fund has returned 18.10% one-year, 20.59% over five-years, and -1.67% over ten years.
The benefit of exposure to a miner, rather than the commodity, is miners have the ability to pay dividends to shareholders in addition to investors benefitting from capital growth in the gold price.
Similar to GOLD, GDX is unhedged, and therefore movements in foreign currencies will impact performance. With a management fee of 0.53%, investors who are looking for an income stream are well suited to GDX.