Considerations When Mulling Gold ETFs

Buoyed by low interest rates and an (until recently) weaker dollar, gold has been one of this year's hottest assets. But with the SPDR Gold Trust (ETF) GLD up more than 27 percent year-to-date, some investors are probably wondering if it is too late to integrate bullion into their portfolios.

Obviously, investors have a taste for defensive, volatility-thumping assets this year, as highlighted by inflows to bond funds and low volatility equity exchange-traded funds. Not to mention GLD's status as this year's top asset-gathering ETF by a significant margin.

Gold's Allure

A traditional reason for embracing gold is its low correlation to other assets, such as stocks and bonds, but investors should still be mindful of periodic increases in those correlations.

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“Although gold historically has had a low correlation with traditional assets, it can at times move in tandem with these assets. Rising correlation can occur during periods when the market is facing liquidity constraints from which investors liquidate gold to shore up assets in other areas of the portfolio. This may mitigate some of gold’s allure as a portfolio diversifier. Despite this, a strategic allocation to gold may provide diversification for a portfolio in the long-run,” said State Street Vice President David Mazza in a recent note.

Gold Bugs

Interestingly, the stereotypical gold investor cannot really be stereotyped any longer. The image of gold being an investment favored by old, politically conservative men is not entirely accurate. Recent data from TD Ameritrade indicate GLD is one of the 10 most widely held ETFs among Baby Boomers, Gen X and Millennials.

For gold bugs, there is nothing wrong with safe-haven demand, and 2016's market action is, to this point, reminding investors of gold's utility. In fact, gold has proven its mettle during market crises ranging from the Soviet sovereign debt crisis to the Long Term Capital Management meltdown to the global financial crisis.

Further boosting the case for gold is weak earnings growth in the United States and low and negative yields on sovereign debt throughout the developed world.

“The mistake many investors make when it comes to investing in gold is that they use it in an attempt to time the market. Investors tend to flee gold when the stock market is rallying but turn to the precious metal when times get tough. However, by the time investors react, chances are the value of their portfolio has dropped while the price of gold has risen — eliminating some of the benefits of a gold exposure,” added Mazza.