New ETFs Offer Unique Gold Exposure

Published on ETF.com

The Rex Shares gold-hedged ETFs—new to market this month—attempt to solve a common asset allocation problem many advisors face: What to do about gold?

Most advisors today feel like they must own gold. Most do so because gold offers diversification and portfolio hedging benefits. It can even prove useful for short-term tactical purposes, such as when the need arises for a safe haven in times of turbulent market action.

But as an asset, gold doesn’t generate any type of earnings yield that compounds, or any type of income. For that reason, many advisors struggle with tying up capital in gold at the expense of other assets. An allocation to gold means a smaller allocation to something else.

For example, in a 60/40 portfolio, if an investor decides on a 5% gold allocation, that would most likely result in a 55/40 portfolio split between equities and fixed income and a 5% gold piece. The allocation to gold usually comes out of equities due to a common volatility pairing—you sell equities and buy gold.

No Sacrifices

This is where the REX Gold Hedged S&P 500 (GHS) and the REX Gold Hedged FTSE Emerging Markets ETF (GHE) come in. They are designed to offer investors the ability to own exposure to gold without having to sacrifice asset allocation.

The actively managed funds invest in equity exposure via stocks or ETFs representative of the equity indexes incorporated into their benchmarks—the S&P 500 or the FTSE Emerging Index, respectively—and they use gold futures to create a gold hedge.

In simple terms, the funds allocate a notional value to the gold exposure that is equal to the value of the equity portion of the benchmark.

To Mike Venuto, co-founder and chief investment officer of New York-based Toroso Investments, these ETFs are the latest example of the ETF structure democratizing hedge fund strategies so that they are accessible to investors everywhere.

“I am a big fan of the innovation they have created with these funds,” Venuto, who recently wrote about different ways of owning gold, told ETF.com. “This structure is similar to what WisdomTree did with the WisdomTree Japan Hedged Equity (DXJ | B-65)—a $100 investment results in $100 of Japanese equities and $100 of long dollars versus yen. With GHS, a $100 investment results in $100 of S&P 500 exposure and $100 of gold exposure.”

For that reason, by design, the exposure GHS offers could not be replicated by owning, say, the SPDR S&P 500 (SPY | A-98) and the iShares Gold Trust (IAU | B-100), because $100 in those positions would result in $50 of S&P 500 and $50 of gold, Venuto says.

“GHS uses a form of leverage to theoretically remove the dollar exposure from equities and place that currency exposure into gold,” he added.

Indirect Exposure

If you think of gold as a currency, most investors get exposure to currencies through their foreign equity allocation. It’s an indirect exposure. But there’s no way to access gold indirectly, because gold is not the currency of any one country. These ETFs allow investors to be long gold while staying fully invested in the market—it’s a manufactured way to get indirect exposure to gold without giving up allocation to any other asset.

This type of access has many applications in portfolio construction, Venuto says.

In the case of GHS, it represents “a smart-beta version of the S&P 500 because it helps to mitigate a factor that is not thought of in most models, which is the diminishing purchasing power of currency,” he noted.

“I also like the intelligent use of leverage on two very different assets that avoids the volatility decay inherent in most leveraged ETFs,” Venuto said. “Ray Dalio, who runs Bridgewater, one of the world’s largest hedge funds, often speaks about owning gold to mitigate currency risk.”

“REX has made this trade available to the average investor,” he added.

GHS comes with an expense ratio of 0.48%, and GHE charges 0.65%.

Contact Cinthia Murphy at cmurphy@etf.com.