The equities market has rebounded off one of the worst starts to a new year, but investors who believe volatility will once again rear its ugly head may want to hedge potential risks down the road with gold exchange traded funds.
JPMorgan Global Head of Quantitative and Derivatives Research Marko Kolanovic argued that the recent rally may be on tenuous grounds, reports Stephanie Landsman for CNBC.
Kolanovic contends that the recent bounce has been more technical in nature and largely backed by momentum investors covering bets that the S&P would plunge. Consequently, the recent moves may have just been a result of portfolio repositioning and not from improved fundamentals.
"Although risk slightly may be on the upside rather than on downside, I would say fundamentally … you [potentially] have 5 percent upside and 10 percent downside, so it doesn't look that great," Kolanovic told CNBC.
Consequently, Kolanovic believes that investors are better off with a defensive gold position now even after the recent run-up in the precious metal.
Furthermore, the strategist projects a weaker dollar will help bolster gold. The Federal Reserve's dovish stance "should put some downward pressure on the dollar and hence should be supportive of gold." The increased likelihood of Donald Trump winning the presidential election could also be bearish on the USD, given the restrictive trade measures the candidate has proposed.
Consequently, if an investor is concerned about the markets and wants an alternative asset that provides a lower correlation to traditional stocks and bonds to hedge a portfolio, one can take a look at gold ETFs that are physically backed by gold bullion stored in bank vaults.
For starters, the SPDR Gold Trust ETF (NYSEArca: GLD), the world's largest ETF backed by physical holdings of gold, has been a go-to option for large traders, hedge funds and institutional investors seeking to capitalize on its large pool of liquidity and tight bid-ask spreads. GLD has almost $33.0 billion in assets under management, an average volume of 7.1 million shares and a 0.40% expense ratio.
Similarly, the iShares Gold Trust ETF (NYSEArca: IAU) is another large option with a lot of active trading. IAU has $7.8 billion in assets under management and an average volume of 5.2 million shares. Additionally, IAU is the cheapest of the gold ETF options with a 0.25% expense ratio.
Consequently, individual retail investors who do not need to move millions of dollars of gold but rather sit on to their gold exposure may find IAU a cheap buy-and-hold option. Something like GLD would be a better play for large institutional-sized traders who may execute huge trades due to the fund's tight spreads and activity.
Alternatively, since IAU and GLD shares are backed by gold stored in London vaults, investors can take a look at the ETFS Physical Swiss Gold Trust ETF (NYSEArca: SGOL) to diversify gold exposure. If something were to happen in London that could affect the gold stored there, SGOL investors will be relieved to know that their gold exposure is stored in Swiss vaults. SGOL has $982.6 million in AUM, a lower average volume of 31,000 and a 0.39% expense ratio.
Additionally, unlike other gold ETFs, the Van Eck Merk Gold ETF (NYSEArca: OUNZ), a relatively new player in the gold space, allows investors to take physical delivery of gold bullion for shares of OUNZ, but potential gold share converters should be aware that fees for physical delivery are significant. OUNZ has $100.3 million in AUM, an average volume of 42,000 and a 0.40% expense ratio.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.