Gold prices are surging - what ETF investors need to know before adding some shine to their portfolios

By Isabel Wang

Why investing in gold-related ETFs is not without risks, according to SS&C ALPS Advisors' Paul Baiocchi

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this week's edition, we look at gold-related ETFs, which quietly beat the market with decent volume last week as the price of the yellow metal rose to near a record high.

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Gold is shining once again.

U.S.-listed exchange-traded funds that track physical bullion, gold futures and mining companies generated big returns last week when a slump in the U.S. dollar on the back of expectations that the Federal Reserve could start cutting interest rates sooner than expected pushed the yellow metal to its highest level in over three years.

The most-active February gold futures contract (GC00)( GCG24) Wednesday settled at $2,067.10 an ounce on Comex, just shy of its record close of $2,069.40 hit in August 2020, according to Dow Jones Market Data.

The SPDR Gold Shares ETF GLD, the largest fund that tracks the price of the yellow metal through physical bullion, rose 2.7% in the week to Wednesday, while the VanEck Junior Gold Miners ETF GDXJ and the VanEck Gold Miners ETF GDX, which track the shares of gold producer, advanced 8.1% and 6.7%, respectively, over the same period, according to FactSet data.

The VanEck Junior Gold Miners ETF and the VanEck Gold Miners ETF were also the best-performing ETFs among over 800 funds that MarketWatch tracked in the past week, according to FactSet.

Commodities Corner: Gold rallies toward 'golden cross' after defying bearish signal

Gold futures have shot up over 10% so far this quarter after geopolitical conflict in the Middle East and the Fed's higher-for-longer interest rate narrative in early October allowed gold to prosper amid a safe-haven scramble.

The rally in gold prices has also been supported by a sliding greenback DXY, which has slumped by 3.1% in November and was on pace for its worst monthly performance of the year, meaning that gold appreciated as it became cheaper for investors holding other currencies.

Gold is often considered a hedge against various risks, including economic downturns, inflation, currency fluctuations, and geopolitical instability.

And gold ETFs are usually designed to provide investors with exposure to the price movements of the precious metal without the need to physically buy, store and ship the metal itself. There are also several types of gold-related ETFs that cater to different strategies, including physical bullion ETFs, gold miner ETFs and leveraged ETFs tracking futures contracts of gold, among others.

However, chasing the gold rally by blindly plowing money into gold-related funds is not without risk, said ETF strategists, as there's a "natural distinction" between investing in the metal itself and other investment vehicles tracking mining companies or buying gold futures contracts.

In theory, shares of mining companies should move alongside the gold prices, but only if the profitability of a mining company also goes up, assuming that they have relatively stable operating costs, etc.

"There's volatility associated with mining companies that isn't necessarily commensurate with what you get in investing in a product that tracks the price of gold or holds the bullion," said Paul Baiocchi, chief ETF strategist at SS&C ALPS. "You're beholden to the execution and operating results of a basket of companies as opposed to simply tracking the price of the metal itself."

Meanwhile, the main drawback for ETFs that use futures for their commodity exposure is that their returns can be influenced by the funds' rolling strategy on futures contracts. Unlike stocks or gold bullion, investors cannot hold commodity contracts indefinitely. The ETF must replace the expired futures with the subsequent month contracts at the risk of losing money since each contract is priced differently based on the number of days until expiration.

For example, when the forward price of a futures contract is higher than the spot price, the commodity is in "contango." Conversely, if the forward price is lower than the preceding months, the commodity is believed to be in "backwardation."

"Historically, there's been a tremendous amount of negative returns coming from that 'roll cost' in certain commodities and there's been some positive performance generation from markets that are actually in backwardation where that contract is actually at a lower price," Baiocchi explained.

See: Fed rate-cut hopes are fueling an 'everything rally' on Wall Street

Meanwhile, some strategists think gold has underwhelmed in the current inflationary cycle as it didn't necessarily have that "exit velocity" relative performance when the markets faced a combination of economic instabilities in the past years that should have sets the stage for it to rally.

"Now that we've seen inflation start to normalize, that would, in theory, make sense that gold has weak relative performance," Baiocchi told MarketWatch in a phone interview on Wednesday. "But the performance we've seen from gold and gold-mining companies last month is at least related to what's going on in the Middle East and the uncertainty about how wide that conflict may get and other bubbling-up geopolitical situations."

The lack of affirmation in the gold trend can also be reflected in the money moving in and out of gold-related ETFs.

Pure directional position-taking in gold-related investment has been "much more muted," said a team of commodity strategists at BofA Global Research led by Michael Widmer. "Aggregate investor purchases, visible in faltering demand for physical gold ETFs, remain well below the levels seen since the onset of the Covid pandemic," they said in their 2024 Metals and Mining Outlook dated Nov 19 (see chart below).

The SPDR Gold Shares ETF saw about $1.1 billion of inflows over the course of the past month, while outflows so far this year totaled nearly $2.1 billion. The iShares Gold Trust IAU, which also holds physical bullion and reflects the current spot market gold value, recorded a total outflow of $361 million in the past month, according to FactSet data.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top Performers                                                                                                                                                                    %Performance 
   ETFMG Prime Junior Silver Miners ETF                                                                                                                                              8.5 
   VanEck Junior Gold Miners ETF                                                                                                                                                     8.1 
   Global X Silver Miners ETF                                                                                                                                                        7.1 
   Amplify Transformational Data Sharing ETF                                                                                                                                         6.9 
   VanEck Gold Miners ETF                                                                                                                                                            6.7 
   Source: FactSet data through Wednesday, Nov 29. Start date Nov 22. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater. 

...and the bad

   Bottom Performers                   %Performance 
   United States Natural Gas Fund LP   -7.9 
   Sprott Uranium Miners ETF           -5.0 
   iShares China Large-Cap ETF         -4.7 
   iShares MSCI Hong Kong ETF          -4.2 
   Global X Uranium ETF                -3.3 
   Source: FactSet data 

New ETFs

CSOP Asset Management Tuesday launched Asia Pacific's first ETF to track Saudi Arabian equities - the CSOP Saudi Arabia ETF HK:2830. The fund tracks the FTSE Saudi Arabia Index, providing exposure to more than 50 large and midcap companies listed on Tadawul, Saudi Arabia's stock exchange. It was listed with an initial investment of over $1 billion, making it the largest Saudi Arabia ETF globally. YieldMax Tuesday announced the launch of YieldMax AI Option Income Strategy ETF AIYY, which seeks to generate monthly income via a synthetic covered-call strategy on C3.ai, Inc. AI. The ETF does not invest directly in AI.IDX Shares last Tuesday announced the launch of the IDX Shares Dynamic Innovation ETF DYNI, which aims to capture opportunities within the technology, AI, blockchain, and emerging innovation sectors while also providing investors a way to defensively rotate into more stable assets during periods of market volatility.

Weekly ETF Reads

It's the end for the ETF devoted to meme stocks, which has fallen 60% since inception (MarketWatch)Popular QQQ ETF on track for biggest monthly gain since July 2022 as tech stocks soar (MarketWatch)New ETF invested in Ozempic maker and exposed to other obesity drugs falls in first day of trade (MarketWatch)The $7 Trillion ETF Boom Gets Blamed Again for Dumb Stock Moves (Bloomberg)Bitcoin Will Reach Its Old Highs With ETF Approval, Galaxy's Novogratz Predicts (Bloomberg)Thematic fund investors miss two-thirds of potential returns, research shows (Financial Times)What ETF Investors Can Learn From Charlie Munger (ETF.com)

-Isabel Wang

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11-30-23 1218ET

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