Precious metals are used by investors as a store of value and for protection in times of uncertainty and inflationary risk. Events like the coronavirus pandemic and moist recently the Russian invasion of Ukraine draws the attention of investors to protection and diversification of their portfolios. This is where precious metals step in – historically known for acting as a prevention of uncertainty in scenarios of geopolitical tensions and inflationary fears. Especially gold and silver, which investors can access through ETFs, exchanged traded funds on the American stock exchanges.
What are ETFs?
Basically, ETFs are exchange traded funds that seek to mirror a benchmark, like the S&P 500 for example, that is compiled by 500 assets traded on the U.S. stock exchanges (NYSE or NASDAQ). Therefore choosing an ETF allows investment in specific sectors without the need of buying a single action, commodity or security, since a single ETF can expose you to hundreds of assets.
Some perks of choosing an ETF are the possibility of following the performance of the whole market instead of following single shares, and also the opportunity of having a better performance. According to Statistica, the number of ETFs has raised 2,650% worldwide from 2003 to 2020.
The rally of gold
One of the gold ETFs is SPDR Gold Trust (GLD) considered the biggest exchange traded funds backed by gold. In January, it registered the highest clear entry of dollars since it was listed in 2004 (US$1.63 billion). The inflow comes at a good moment. In the last 6 months the fund has raised 13.97%, while S&P 500 dropped 7.18%.
On Passfolio, you can find almost 60 funds backed by gold, like SPDR Gold MiniShares Trust (GLDM), by the same managers of SPDR Gold Shares. It seeks to reflect the performance of the price of gold bullion and registered, in the last 6 months, a rise of 14.2%. Remember, however, that past performances don’t guarantee a future return.
Just as investment funds backed by gold, silver – used in several products, such as jewelry, household appliances, electronics and batteries – it is another commodity that is historically used as a store of value. Recently, Seeking Alpha –a platform of crowdsourcing content for financial markets – disclosed the three ETFs with the best performance from January 31, 2021 to January 31, 2022.
They are: Invesco DB Silver ETF (DBS), based on future contracts of silver; and Aberdeen Standard Physical Silver Shares ETF (SIVR) and iShares Silver Trust (SLV) – both hold physical silver on behalf of their investors.
Whenever in doubt of which ETF to choose, evaluate the performance of the fund in the period of one year and, if possible, evaluate longer periods, between 3 and 10 years; remember to check the percentage a year charged as expenses.
Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.
Commodity futures-linked ETFs include additional risks, such as the inherent fluctuations of commodity prices, the speculative nature of futures investments and the risk that a commodity futures-linked ETF’s price will not directly track, and can perform differently than, the spot price for the commodity itself. Commodity futures-linked ETFs may also be impacted by contango and backwardation. A commodity futures-linked ETF that is designed to achieve its investment objective on a short term basis, potentially even daily, is not designed to, and will not necessarily, track the underlying index or benchmark over a longer period of time.