- Inflation is kryptonite to bonds
- Gold is typically an inflation hedge.
- Gold typically rises during times of economic turmoil, such as a recession.
- Strategy Shares Gold-Hedged Bond ETF (GLDB) follows a two-piece strategy, creating a stacked-return product that provides exposure to two different assets, investment-grade bonds and gold.
- The fund is a way for a bond fund to hedge against the threat of inflation, and a gold fund to pay a yield.
Inflation is kryptonite to bonds and gold is typically a hedge for inflation. What if we combine these two great tastes together into one ETF, like Reese's mixture of chocolate and peanut butter candy.
The Strategy Shares Gold-Hedged Bond ETF (GLDB) does exactly that. It offers a way for a bond fund to hedge against the threat of inflation, and a gold fund to pay a yield.
Two-Piece Strategy:
GLDB aims to be a gold lover's dream, a gold fund with a yield. Because gold is a commodity, it doesn't pay a dividend or interest payment. That's ok when the price rises. But when the dollar is stable, gold sits like a lump of coal, giving off no return.
This ETF follows a two-piece strategy, a stacked-return product that provides exposure to two different assets. First, it builds a portfolio with 100% exposure to the U.S. investment-grade corporate-bond market.
Then it gets an overlay of a total-return-swap that tracks the near-month gold-futures contract, giving it 100% exposure to the price of gold.
Some people are hesitant to own gold because it doesn't pay a dividend.
GLDB offers investors exposure to the gold market, then takes the interest from the bonds and pays it out as a monthly distribution. And Voila! A gold fund that pays a yield.
According to Strategy Shares, the strategy seeks to help investors generate income that maintains its purchasing power by providing exposure to two markets, bonds and gold. It tracks the Solactive Gold-Backed Bond Index and charges an expense ratio of 0.79%.
A Morningstar analysis of the fixed-income exposure based on the long position says 33% of the portfolio is in AAA-rated bonds. About 8% of the portfolio is in AA-rated bonds, and around 20% of the portfolio is BBB-rated bonds.
The breakdown of the sector weightings of the bonds:
Cash | 21% |
Financials | 18.3% |
Consumer Staples | 9.9% |
Communications Services | 8.6% |
Health Care | 6.9% |
Industrials | 6.9% |
Information Technology | 6.7% |
Energy | 6.4% |
Utilities | 4.9% |
Consumer Discretionary | 4.9% |
Real Estate | 3.1% |
Materials | 2.4% |
Source: Strategy Shares 3/31/23
Why Hold Gold?
Inflation Hedge: One of the main reasons for holding gold is that it's a hedge against long-term inflation. Gold has a 5000-year history of maintaining its value. When inflation erodes the dollar's value, prices rise because it takes more dollars to buy the same amount of gold. That's because gold is a tangible asset with intrinsic value. Over the past year as the dollar lost value, gold held its value.
"Since 1973, when the Bretton Woods System was no longer in place, the value of the U.S. dollar has eroded by more than 80% because of inflation," according to Strategy Share's website. "In recent decades, the money supply has grown at an unprecedented rate, with the M1 Money Supply increasing by more than 1200% since 2008."
Diversification: Gold is a non-correlated asset used to diversify a portfolio and reduce risk. Since gold doesn't move with the stock market it's considered a good investment during times of market volatility. It acts as portfolio insurance dampening losses during a bear market.
Gold is also considered a safe-haven in times of economic uncertainty, and performs well during recessions and geopolitical instability. With many people predicting a recession, every portfolio should hold a little gold.
Essentially: The strategy is short the dollar; go long gold.
Bond Basics
Inflation erodes a bond's value. When inflation increases, it creates a chain reaction that leads to central banks boosting interest rates. When interest rates rise, bond prices fall.
Last year inflation soared to its highest rate in 40 years. The Consumer Price Index, one of the government's key inflation gauges, surged more than 9% for the year ended June 2022. The U.S. is losing purchasing power amidst this rising inflation.
In an effort to bring inflation under control, the Federal Reserve hiked interest rates seven times up from 0% in 2022. In May, the Fed raised the Federal Funds Rate to a target range of 5% to 5.25% -- it's highest point since 2007.
Bonds typically zig when stocks zag, but last year, when the S&P 500 sank nearly 20%, bonds also did poorly. The inflation and rising interest rates together made 2022 the worst year for bonds on record, according to Edward McQuarrie, a professor emeritus at Santa Clara University and an investment historian.
Short Life
GLDB turns two years old in May. So, 2022 was the fund's first year for a 12-month performance. In light of last year being the worst bond market in history, it's not shocking that GLDB posted an abysmal return of negative 19.80%, according to Morningstar.
GLDB's benchmark, the Bloomberg U.S. Corporate Total Return, tumbled 15.8%. A comparable fund is the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which fell 17.9% last year. GLDB's 12-month yield is 2.44%, according to Morningstar.
At the same time gold experienced wide volatility and ended the year flat. The SPDR® Gold Shares (NYSE:GLD), which tracks the price of gold, lost 0.77%.
A major downside to holding gold is can be volatile, which means your investment could lose value. The 52-range of the SPDR Gold Shares was $150 to $190.
It's unlikely that the U.S. will see a bond market similar to 2022 for a long time. And with the current interest rate environment and predictions of a possible recession, it seems that most investors should have some gold in their portfolio.
Year to date (5/2/23) GLDB is up 12.6%, compared with GLD, which is up 10. 5%, and LQD, up 4.8%, according to Morningstar.
In conclusion, the Gold-Hedged Bond ETF is an interesting idea for investors looking for exposure to gold and a high-grade corporate-bond portfolio in an inflationary environment. Combining bonds falling in value with rising gold prices creates a portfolio hedged to help minimize losses.
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