This Is The Top Gold ETF For Market Risk Protection
(Kitco News) - The desire for gold isthe most universal and deeply rooted commercial instinct of the human race. -Gerald M. Loeb
A close look at historical price returns shows that history agreeswith the age-old adage of holding gold as a hedge but what is the best way to put this inpractice?
The purest way for investors to play the yellow metalwithout buying outright physical gold bullions is to use gold-backed exchange-tradedfunds (ETFs), but not all ETFs are created equal.
The analysis shows that iShares Gold Trust (NYE: IAU) is thebest option for investors looking to hedge equity exposure.
Variables For TheTests
In order for the comparisons to be consistent, parametersand assumptions were set as follows:
1) A “market correction” is defined as a fall in the S&P500 of greater than, or equal to, 5%.
2) Only pure-play bullion ETFs are considered; no goldmining ETFs will be used.
3) ETFs must have ample liquidity, as defined by an activetrading volume.
4) No leveraged ETFs are allowed.
5) Only long positions are considered (no put options,inverse, or bear ETFs).
6) There must be enough price history to cover at leastthree years of data (no recently incepted ETFs).
7) No ETFs using options based on other gold-backed ETFs(such is the case for GLDI).
Using etfdb.com’s onlinescreener, the above parameters produced the following search results, ranked inorder of assets under management (AUM):
Table 1
Testing ThePerformance
We then examined how each of these ETFs have performedduring past market corrections, going as far back as the price data allows,which in this case, is late 2014 given that the youngest ETF on the list, OUNZ,was only incepted in May, 2014.
Table 2a gives a summary of the findings. There were a totalof eight market corrections since 2014, with corrections of greater than 10%marked in red squares.
The performances of each of the gold ETFs during theseperiods are indicated on the right side of the table, with their medianoutperformance, as defined as the median returns of the ETFs minus the medianreturns of the S&P 500, circled in red at the bottom.
GLD and IAU are more or less tied in the medianoutperformance category.
Table 2a
As ETFs are managed by fund issuers, management fees must beconsidered, even if the funds themselves may be passively managed. The finalstep is then to compare the results by taking into account annual expenses forholding the fund.
Table 2b shows the funds’ median outperformance afterdeducting their latest expense ratios, since median fund returns in Table 2a donot consider annual fees.
Table 2b
Here, IAU is thewinner, at 7.88% outperformanceversus the S&P 500, edging slightly above GLD’s 7.74%.
Extending TheTimeframe
What happens when we add in more price history? The nextstep of the test repeats the same process but uses data going back to the endof Q1 2009, when the S&P 500 has troughed from the recession. Because OUNZand SGOL were not incepted until after 2009, they are excluded in this step ofthe analysis.
Table 3a
Table 3b
Since 2009, the S&P 500 recorded 24 periods of marketcorrections, of which six were greater than 10%, as indicated by the red boxesin Table 3a. In the same table, the yellow highlights showed periods of ETFunderperformance; it only happened once during the May - June 2013 correction.
Table 3b shows ETF outperformance after fees.
Here again, IAU wasthe clear winner, beating out its rivals at 7.34% outperformance.
ConcludingObservations
This analysis should not be interpreted as discouraging forall other gold ETFs. In fact, the tables above show that on an average basis,all the major gold ETFs have outperformed the market during periods of stockcorrections.
Two important observations should be noted from thecalculations done in this piece:
1) Gold does not hold a perfect inverserelationship to the market; investors should be aware that outperformance doesnot equate to positive returns in gold during market corrections.
2) Gold does not outperform the market duringcorrections 100% of the time, although on average, major gold ETFs yieldbetween 7% to 8% outperformance during corrections, which is a great trackrecord as a hedge instrument by any standard.
The final word is that despite GLD’s popularity and ubiquityamongst investors, as evidenced by its largest AUM in the market, its iShares competitor, IAU, beats it as amarket hedge instrument, owing primarily to its slightly lower cost - 0.25%expense ratio for IAU versus 0.4% for GLD.
Disclaimer: the authoris not an investment advisor and this article is not intended to issueinvestment advice.
By David LinFor Kitco News
Follow @davidlinMTL
dlin@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.