Tags: gold | etf | invest | fees | liquidity

WSJ: 3 Aspects to Look for in a Gold ETF

WSJ: 3 Aspects to Look for in a Gold ETF

By    |   Friday, 18 October 2019 01:17 PM

Competition has grown among gold-backed exchange-traded-funds (ETFs) in recent years, so those looking to take the plunge into such investments are urged to choose carefully and literally not become distracted by shiny objects.

With trillions of dollars of debt around the world now offering sharply lower — or negative — yields, traders caught the bullion bug, sending the price of gold soaring to six-year highs recently, the Wall Street Journal recently explained.

WSJ.com also highlighted three factor that fund investors should consider before picking a gold ETF:

  • Cost or liquidity. Investors must decide which is more important to them: a fund’s annual expenses or its trading volume. Liquidity usually refers to the volume of shares traded on a given day. For investors focused on liquidity, Todd Rosenbluth, head of ETF and mutual-fund research at New York-based CFRA Research, points to SPDR Gold Shares (GLD), which launched in November 2004 and was the first bullion-backed ETF. About 12.3 million shares of GLD change hands each day on average, which should be enough to give most well-heeled investors the liquidity they want, he says. The annual expense ratio is 0.4%, which is higher than many other bullion-backed ETFs.
  • Sponsor stability. “Another important consideration for investors weighing gold ETFs is the stability of the fund’s sponsor. Put another way, is the company behind the ETF robust enough that investors don’t have to worry about the fund folding?,” WSJ.com explained. Each year around 100 ETFs shut down, says Rosenbluth. “You have to look at the firm’s history and the firm’s product portfolio,” says Ben Johnson, director of global ETF research at Morningstar in Chicago. In other words, is the fund sponsor run well enough to sustain a new ETF while it gets established?
  • Avoid leverage and shorting. Meanwhile, other gold ETFs complicate the matter by using derivatives to juice returns. Such ETFs often use phrases such as “double-long” or “inverse” in their titles. Most individual investors would be wise to avoid them, Richard M. Rosso, director of financial planning at Houston-based wealth-management firm RIA Advisors, told the Journal. Only experienced investors with a lot of self-discipline and a predetermined plan for when to buy and sell should consider leveraged investments, he told the Journal, and even then they should own them only for short-term trades. “It’s really like putting a nuclear weapon in the hands of someone,” says Rosso.

On Friday, spot gold was down 0.2% at $1,489.02 an ounce, following last month’s rally to $1,557.11, the highest level since 2013. Prices touched a record of $1,921.17 in September 2011.

Meanwhile, recent U.S. data showed retail sales falling for the first time in seven months in September, suggesting that manufacturing weakness could be spreading to the broader economy, while industrial output for last month also dipped.

“Economic data out of U.S. and China are in favour of further (monetary policy) easing that will be supportive for gold,” SP Angel analyst Sergey Raevskiy told Reuters.

The underlying momentum in gold is still positive because stimulus from central banks is still on the agenda, the economy is struggling to pick up in the face of trade war and there are geopolitical risks in the Middle East, Turkey and Syria while Brexit is still not quite out of the way, he added.

The U.S. Federal Reserve is set to meet at the end of the month to decide on further interest rate cuts this year.

Meanwhile, Bloomberg predicted that the next push in gold prices will come from retail investors as risks remain skewed to the upside, according to Standard Chartered Bank.

Having already rallied to the highest in more than six years, bullion will still benefit from safe haven flows, according to Suki Cooper, precious metals analyst at the bank. Prices will average $1,510 an ounce in the fourth quarter of 2019 and $1,570 in the same period next year, she said.

Bullion is up more than 15% this year as central banks lower borrowing costs and global growth drags amid the prolonged U.S.-China trade war, boosting demand for haven assets. While some risk appetite returned to markets with the two countries agreeing a partial trade accord last week, investors continue to add to exchange-traded funds backed by the metal, with holdings closing in on record levels previously seen in 2012.

“Although we’ve seen ETF holdings and tactical investment hitting elevated levels, like peak highs, we think retail demand is really going to be what drives the next leg higher,” Cooper told Bloomberg. “Retail investors almost want confirmation of further rate cuts, some weakness in the equity markets before they move into gold. The next leg higher in 2020 is going to be led by the retail side.”

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Competition has grown among gold-backed exchange-traded-funds (ETFs), so investors looking to take the plunge into such investments are urged to choose carefully and literally not become distracted by shiny objects.
gold, etf, invest, fees, liquidity
Friday, 18 October 2019 01:17 PM
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