Later this year, the SPDR Gold Shares (GLD) will celebrate its 15-year anniversary. In retrospect, GLD’s launch was one of the greatest innovations within the exchange-traded fund marketplace because it securitized physical assets and provided investors with greater liquidity and opportunities to broaden diversification beyond stocks and bonds. Although GLD is a popular vehicle with $32.5 billion in assets, advisors shouldn’t limit their commodities investing to gold.
Before we talk about strategies for expanding beyond gold investing, let’s first discuss GLD’s structure. Each share of GLD is designed to represent 1/10 an ounce of gold bullion. For investors wanting gold exposure, it’s certainly a lot easier to buy a share of GLD at the current price of $122 versus buying one ounce of physical gold bullion, which trades at around $1,300. Moreover, shares of GLD can be hedged, leveraged or held, thereby providing the ultimate flexibility to owners.
Unfortunately, some advisors and investors make the mistake of using gold as a substitute for their market exposure to commodities. In truth, gold isn't a diversified asset, nor does it serve as an accurate proxy for the performance of commodities as a group. To obtain diversified exposure, advisors should use a commodities fund that holds a broad basket of commodities in the agriculture, energy and metals sectors. One example is the USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI), which at any given time will hold exposure to gold and other commodities.
The fund's expense ratio of 0.80 percent is double that of GLD. That might seem pricey, but it's still a fairly economical way to get access to a broad range of commodities.
Another strategy for investing beyond gold is to choose a diversified basket with exposure to other precious metals. For example, the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR) is a 4-in-1 product that holds physical gold, silver, platinum, and palladium. Introduced in 2010, GLTR charges annual expenses of just 0.60 percent, providing a much more affordable solution compared to taking physical delivery of metals. Moreover, GLTR allows investors to spread their bets across various precious metals versus a one-dimensional approach.
Indeed, some advisors have moved beyond investing in traditional precious metals. "Gold and silver are not really the story,” says Frank Stanley, president at Global Wealth Analytics in Encinitas, Calif. “Palladium is now the most precious metal, driven by higher emissions demand, battery demand and limited mining ability to keep up. It’s the perfect technical and fundamental story.”
During the past three years, the Aberdeen Standard Physical Palladium Shares ETF (PALL), which tracks physical palladium, has annualized returns of 38.7 percent versus 1.2 percent for GLD and a 0.5 percent decline in the iShares Silver Trust (SLV) during that period. Looking ahead, it’s unlikely the economic utility of gold or silver will be able to match palladium.
The lackluster performance of gold and silver begs the question of whether traditional precious metals are in a secular decline? If so, contributing factors to the decline will be the rising economic importance of lesser-known precious metals like the aforementioned palladium. Additionally, the rise of alternative stores of wealth like bitcoin and other cryptocurrencies are challenging gold. As society becomes more familiar and comfortable with digital currencies, it could further erode gold’s role as a haven for protecting wealth.
Ultimately, advisors should avoid a one-dimensional strategy toward investing in precious metals. Using a diversified approach will provide clients with gold exposure while allowing them to benefit from important trends in other sectors within the commodities complex.
Ron DeLegge is founder and chief portfolio strategist at ETFguide.