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GLD Versus SPY: An Interesting Divergence

|Includes:GLD, SPDR S&P 500 Trust ETF (SPY)

GLD versus SPY

The SPDR S&P 500 Trust ETF (NYSEARCA:SPY) dramatically outperformed the SPDR Gold Shares ETF (NYSEARCA:GLD) in the first quarter of 2013, as the chart below illustrates, but, interestingly, GLD is considerably less expensive to hedge over the next several months.

Low Volatility On Both Gold and S&P 500

As of quarter end, expected volatility was low for both gold and the S&P 500, as measured by their respective Chicago Board Options Exchange volatility indexes. The VIX, which measures expected volatility over the next 30 days in the S&P 500, closed at 12.70, and the GVZ, which uses the same methodology to measure expected volatility in gold, closed at 12.41.

Bigger Divergence In Six Month Hedging Costs

Both GLD and SPY are inexpensive to hedge over the next several months, as you might expect from their low expected volatilities over the near term. Nevertheless, the difference in cost, as a percentage of position, is quite striking looking at hedges expiring in September. Compare the two screen captures below.

1) Hedging SPY

These were the optimal puts*, as of quarter-end, to hedge 1000 shares of SPY against a greater-than-15% drop between March 28th and September 20th.

As you can see at the bottom of the screen capture above, the cost, as a percentage of position value, was 1.03%. Note that, to be conservative, the cost is calculated based on the ask price of the optimal puts; in practice, an investor can often buy the puts for less (i.e., some price between the bid and ask).

2) Hedging GLD

And these were the optimal puts to hedge 1000 shares of GLD against the same 15% drop over the same time frame.

As you can see at the bottom of the screen capture above, the cost, as a percentage of position value, was 0.42% -- roughly 40% of the cost of hedging SPY.

*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones. The screen captures above are from the Portfolio Armor iOS app.

Stocks: SPY, GLD