Commodities have one of the smallest percentages among all asset classes allocated to exchange-traded funds (ETFs). Among commodities funds, asset penetration is dominated by precious metals funds — namely gold. And among gold ETFs, the dominant force is the SPDR Gold Trust (ETF) (NYSEARCA:GLD).
GLD, which turns 13 years old in 2017, transformed the way investors access gold and is now the world’s largest exchange-traded product backed by physical holdings of the metal. This ETF is designed to reflect the spot price of gold bullion.
“The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold,” notes State Street Global Advisors (SSGA), the issuer behind GLD. “The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time.”
GLD has more than $35 billion in assets under management, easily making it the largest gold ETF in the world and by far the largest commodities ETF trading in the U.S.
Allocate to Offset Volatility
While there are various reasons to invest in gold, many investors — including professional investors — remain consistently under allocated to the commodity. That said, an ideal gold allocation is 2% to 10%, depending on the individual investor’s objectives, risk tolerance and other factors.
“Gold can be used in portfolios to protect global purchasing power, reduce portfolio volatility and minimize losses during periods of market shock,” according to the U.K.-based World Gold Council. Central banks, stewards of the world’s biggest long-term investment portfolios, use gold to mitigate portfolio risk in this way, and have been net buyers of gold since 2010, according to the trade group.
However, there are drawbacks to owning gold and, consequently, ETFs like GLD. For example, GLD and physical gold bars do not pay dividends or interest, meaning investors are left to entirely bank on capital appreciation. Second, because it does not bear interest, gold can be vulnerable to global central bank policies, including those of the Federal Reserve.
Think about it this way: If the Fed is raising rates, thereby paying investors more to buy government bonds, there is not much incentive to stick with zero-interest gold.
On a related note, gold, like other commodities, is denominated in dollars. That means that as the dollar rises with interest rates, GLD and gold investors can see their value eroded.
GLD charges 0.4% per year, or $40 on a $10,000 investment. It is the most heavily traded commodities ETF, offering investors tight spreads, low transaction and ease of execution.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.