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One of the hottest market sectors this year has been gold. As of the close on May 26, the S&P/TSX Global Gold Index was up over 5% year-to-date.
Gold has been doing well for the past several months despite rising interest rates, which normally are a headwind for the precious metal. The price had been fluctuating around US$2,000 an ounce before sliding back to the US$1,950 range. Some experts predict it will rise over the summer, due mainly to big purchases by central banks.
But most income-oriented investors aren’t participating in the gold surge. That’s because gold doesn’t pay interest or dividends. It just lies in a vault like a lump of inert metal (which it is). Not only does it not generate income, but it costs money to keep it safely stowed. Criminals are always happy to take it off owners’ hands, as we were reminded by the recent $20 million heist at Toronto’s Pearson Airport.
But financial engineers have devised a way to have your gold and live off it too. They’ve launched exchange-traded funds (ETFs) that invest in gold miners and generate income by selling covered call options against some or all of the portfolio. Investors who hold these ETFs are currently receiving attractive yields as well as capital gains. Here is a look at two Canadian-based entries. Prices are as of May 26.
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 59% of the holdings are in Canadian stocks, with 13% in the U.S. and 28% international. Top holdings include Gold Fields Ltd., AngloGold Ashanti Ltd., Kinross Gold Corp., Endeavour Mining, and B2Gold Corp. The ETF was launched in June 2011 and has about $167 million in assets under management. The management expense ratio (MER) is 0.71%.
The managers write covered call options against the securities in the portfolio to generate income, which is paid to investors on a quarterly basis. Recent performance has been impressive. The fund was up 31.8% for the six months to the end of April. Based on the trailing 12-months distributions, the yield at the current price is 8.75%.
But a word of caution. These results are outliers. The average annual compound rate of return since inception is -1.8%. 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. Over the past 10 years, the fund has made profits four times and lost money on six occasions.
Horizon Gold Producer Equity Covered Call ETF (TSX: GLCC). The principle here is the same. The fund holds a portfolio of top gold producers and actively writes covered call options against them. The top names are somewhat different from those in CGXF, however, and include Agnico Eagle Mines, Barrick Gold, Franco-Nevada, and Newmount Corp.
Like CGXF, this fund was also launched in 2011, but it’s been more successful in attracting investor interest, with $261 million in assets under management. The MER is 0.79%. This fund makes distributions monthly, currently at a rate of $0.22 a unit.
The patterns between these two funds are similar. Both have been strong recently – this one was up 34.09% in the six months to April 30. But the average annual compound rate of return since inception is -1.37%.
In short, neither of these funds should be considered a long-term hold. They are only suitable for opportunistic investors, who can tolerate risk and are prepared to sell quickly if gold prices turn down.
If you have a money question, send it to gordonpape@hotmail.com and write Fund Library Question in the subject line. Sorry, I can’t guarantee a personal response, but I’ll answer as many questions as possible here.
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. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
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Notes and Disclaimer
Content © 2023 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.
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