Join Fund Library now and get free access to personalized features to help you manage your investments.
Gold is one of the great success stories of 2024. Gold futures closed on August 7 at US$2,390.50 per ounce, up 16.0% from US$2,062.48 at the end of 2023. That beat the S&P 500 and was close to Nasdaq’s gain of 18.1%.
Some investors continue to believe that owning gold means sacrificing cash flow. That’s not necessarily true. It all depends on the form in which you hold the precious metal.
Owning gold directly or through one of the ETFs that are based on the physical metal is a non-starter for income-oriented investors. For example, the New York-based SPDR Gold Shares ETF (NYSEArca: GLD), the world’s largest physically backed gold ETF, has gained about 15.4% so far this year. But it’s all been earned as a capital gain; the fund makes no distributions.
If you want to have your cake and eat it too, there are some gold funds that provide steady cash flow. But there are some drawbacks to this approach, and some ETFs are performing better than others. Here’s a look at the comparative performance of two Canadian listed ETFs.
CI Gold+ Giants Covered Call ETF (TSX: CGXF) invests in a portfolio of at least 15 leading gold producers (as measured by market capitalization) listed on North American exchanges. About 60% of the holdings are in Canadian stocks, with 13% in the U.S. and 27% international.
Top holdings include Kinross Gold Corp., AngloGold Ashanti Ltd., B2Gold Corp., Harmony Gold Mining, and Gold Fields Ltd.
The managers write covered call options against the securities in the portfolio to generate income, which is paid to investors on a quarterly basis.
The ETF was launched in June 2011 and has about $151 million in assets under management. The management expense ratio (MER) is 0.72%.
Although the yield is impressive, investors are paying for it in the loss of capital gains, due to the call option strategy. While the price of gold has moved steadily higher, the fund’s total return was only 5.4% for the six months to the end of June. That’s not an aberration. Since inception, the fund shows an average annual compound rate of return of -1.1%.
In other words, if you bought units when they were launched, you’d be out of pocket right now – not by much, but still a loss. That doesn’t work for us, and wouldn’t be a suitable gold investment at this time.
Global X Gold Producer Equity Covered Call ETF (TSX: GLCC) debuted in 2011 under the Horizons name. All the Horizons funds have recently been rebranded as Global X.
The principle here is the same as with the CI fund, but this fund works better. Like the CI entry, the fund holds a portfolio of gold producers and actively writes covered call options against them. The top names are somewhat different from those in CGXF, however, and include Kinross Gold, Newmount Corp., Agnico Eagle Mines, Barrick Gold, and AngloGold Ashanti.
Like CGXF, this fund was also launched in 2011, but it’s been more successful in attracting investor interest, with $233 million in assets under management. The MER is 0.78%.
This fund makes distributions monthly, currently at a rate of $0.22 a unit.
The patterns between these two funds are similar, but the recent performance is quite different. This fund is up 13.5% year-to-date (August 7) and shows a one-year gain of 19.3%.
The metal itself has done better, but if you’re looking for cash flow from your gold holdings, this is a decent choice. But this is not an invest-it-and-forget it security. The average annual compound rate of return since inception is also negative, at -0.82%. It’s a good choice now, but if you start to see weakness, bail out.
As always, consult with your advisor to ensure any potential investment fits with your financial objectives and risk tolerance.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/hallojulie
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
