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Gold Related Funds

Instead of buying gold or stock in gold companies, you can gain exposure to the precious metal and the security and diversification it provides by purchasing a number of different gold-related financial products. These products trade like stocks on major exchanges, some simply track the price of gold while others offer different combinations of risk and return to suit your investment objectives.

Exchange Traded Funds Backed by Gold

If you are considering buying physical gold for your RRSP, you can avoid the hassles of transportation, verification and storage by simply buying an exchange traded fund (ETF) that tracks the price of gold. Compared to gold bullion, ETFs offer much more liquidity. Like stocks, they can be easily bought and sold. Some ETFs are backed by physical gold and actually allow shareholders to take possession of their bullion if they desire.

The S&P Gold Index (GLD) is the world’s biggest ETF that is backed by physical gold. It is one of the largest private holders of gold in the world and trades on a handful of international exchanges. Managed by State Street Global Advisors, the fund has an expense ratio of 0.4%. Each GLD share closely tracks the price of a tenth of an ounce of gold in U.S. dollars.

The most actively traded ETF that is backed by gold bullion and trades on the Toronto Stock Exchange in Canadian dollars is the iShares Gold Bullion Fund (CGL). It is hedged against U.S. exchange rate risk so it is essentially like trading gold in Canadian dollars. The expense ratio is 0.56%. CGL.C is a derivative of this fund that is not hedged against U.S. exchange rate risk. The gold bullion that backs these funds is stored by the Bank of Nova Scotia.

The iShares Comox Gold Trust (IGT) is a similar product that trades on the Toronto Stock Exchange. It is a derivative of the U.S. iShares Gold Trust, IAU, which trades on the American Stock Exchange. These funds hold physical bullion and have an expense ratio of 0.40%.

The Central Fund of Canada, also known as the ‘sound monetary fund,’ was incorporated in 1961 in Alberta. It was the first gold-linked financial instrument anywhere. Originally a closed end fund, they changed their prospectus in 1983 to become an exchanged traded fund that holds gold and silver bullion, which are stored in a vault in Canada. It trades on the Toronto Stock Exchange and is priced in either in U.S. dollars (CEF.U) or Canadian dollars (CEF.A).   It also trades on the NYSE (CEF). The expense ratio for this fund is 0.32%.

 

ETFs Backed by Gold Futures

Futures contracts are agreements to buy (long position) or sell (short position) a given commodity at a set price on a specified date. You can buy these contracts for a fraction of the price of the commodity, which is known as the margin requirement. Those who need to buy or sell the physical commodity (such as gold miners) purchase futures contracts to hedge their price risk. However, the contracts are also traded on daily exchanges by speculators who never actually buy or sell the underlying commodity. Futures provide investors with a high degree of leverage – there is a lot of upside potential but you can also lose more than your initial investment.

Some ETFs are backed by gold futures contracts. The Horizons COMEX® Gold Bullion ETF (HUG) aims to track the daily return on monthly gold futures contracts net of fees. The HUG ETF has a management fee of 0.65%. It is hedged against U.S. exchange rate risk and daily returns are close to the returns on physical gold (see graph below).

If you are looking for a leveraged play, The Horizons BetaPro COMEX® Gold Bullion Bull Plus ETF (HBU) and the Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF (HBD) seek to double the daily performance, or inverse daily performance for the bear fund, of the HUG ETF. These investments are denominated in Canadian dollars and hedged against U.S. exchange rate risk. The management fees are 1.15%.

The graph below shows the funds backed by gold and by gold futures (CGL and HUG) performing very similarly. The leveraged bull fund (HBU) moves in the same direction as gold and gold futures with much higher volatility. The returns on the leveraged bear fund (HBD) are opposite those on the bull fund.

Screenshot 2015-07-07 13.40.18

Gold Stock Index Funds

Index funds are professionally managed ETFs that aim to track various stock indexes by investing in the same stocks at the same weights (most indexes are weighted by market cap). Index funds allow investors to gain exposure to an industry without the risk of picking specific stocks. Funds that passively replicate indexes tend to have small management fees. For a larger fee, you can buy into a mutual fund where professional analysts and portfolio managers strategically buy and sell stocks within a sector.

The Toronto Stock Exchange’s Global Gold Index includes 40 global gold companies.  The TSX Global Gold Index Fund (XGD) is an ETF that seeks to replicate this index, net of a 0.55% management fee. Like the underlying index, the ETF is weighted by market cap; the largest holding are the biggest gold miners (Goldcorp, Newmont and Barrick).

For exposure to smaller gold companies, the Bank of Montreal’s Junior Gold Index ETF (ZJG) replicates the Dow Jones North American Select Junior Gold Index. The fund is weighted by market cap and includes 30 small and mid-cap gold stocks. The expense ratio is 0.55%.

The Bank of Montreal also manages the Global Gold Equal Weighted Index Fund (ZGD). This fund holds a subset of the TSX/S&P Global Gold Minors Index which includes companies involved in the production and extraction of gold. Securities in the fund are assigned fixed weights, whereas most indexes are weighted by market cap. The management fees are 0.55%.

The Market Vector Gold Miner’s ETF (GDX) is a U.S. index fund that seeks to replicate the New York Stock Exchange Arca Gold Miner’s Index. It includes 41 small, medium and large cap global gold mining stocks. It trades in U.S. dollars and has an expense ration of 0.53%.

Mutual Funds

Sprott Gold Bullion Fund (SPR216) is a professionally managed fund that invests mostly in physical gold but also in other gold related instruments. There is a minimum initial investment of $1000 and a management fee of 0.8%.

Sprott Gold Miners ETF (SGDM) and Sprott Gold Miners Junior ETF (SGDJ) (which are now part of Schwab ETF Onesource) are professionally managed funds that endeavour to outperform passive stock index funds using their expertise to pick the stocks within their benchmark indexes with the most upside potential. Like many managed funds, they have struggled to beat their benchmark. The management fees for these funds is 0.57%.

There are numerous professionally managed funds that provide exposure to gold stocks. Those with low expense ratios are not a bad alternative to passive index funds. However, finding a fund that consistently outperforms a benchmark index is nearly impossible and passive funds usually have lower management fees.

Another option for a diverse play on gold is through Franco-Nevada Corp (FNV.TO). This is a publicly traded company that manages a portfolio of gold-linked investments. Based out of Toronto, they are a royalty and stream company and do not operate mines. According to their website, “Franco-Nevada can provide yield along with more upside than a gold ETF with less risk than an operating company.” They pay dividends and trade on the Toronto Stock Exchange.

 

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