Rate Hike Odds Weigh On Gold ETFs

The yellow metal hit a seven-week low as equities rallied and odds of another rate hike to end this year increased. Although it covered some of its earlier losses, as dollar pared its gains, prices still remain low.

Factors Driving Gold Prices

U.S. equities have been rallying owing to multiple factors. Institute for Supply Management’s (ISM) survey showed that its measure of national factory activity surged to a more than 13-year high of 60.8 in September from 58.8 in August. This led to a rally in the markets and a fall in gold prices.

U.S. Treasury yields increased as Republican leaders unveiled a tax reform plan aimed at reducing taxes for the corporate and for individuals. Moreover, the Federal Reserve hinted at a possible rate hike in the December meeting. The current probability of a December rate hike of 25 basis points is 76.7%, per the CME Fed watch tool.

Adding to the stock market rally, the current favorite to lead the Fed, Kevin Warsh, is seen as a friend of the administration who is expected to expedite the process of deregulation and further rate hikes if he assumes the position currently held by Janet Yellen (read: Top ETF Stories of September).

Moreover, one of the major consumers of gold, India, is unlikely to generate much festive demand compared with previous years. The Indian economy is yet to recover from the major shocks of demonetization and GST dealt by prime minister Narendra Modi, and this is expected to impact festive gold purchases.

Geopolitical Risks

However, the future is not that bleak for the precious metal. North Korea’s foreign minister Ri Yong Ho suggested that another hydrogen bomb test in the Pacific Ocean might be in the cards. Gold is seen as a safe haven investment and with increasing uncertainty relating to North Korea, we might see a spike in demand for gold focused funds.

Let us now discuss a few ETFs focused on providing exposure to gold (see all Precious Metals ETFs here).

SPDR Gold Shares (HK:2840) ETF (V:GLD)

This fund offers physical exposure to gold. It seeks to track the performance of the gold bullion and might turn out to be a cost-efficient way of gaining exposure to the commodity even after accounting for the fund’s expenses.

It has AUM of $34.9 billion and charges a fee of 40 basis points a year. It has returned 10.2% year to date and 0.04% in a year (as of Oct 3, 2017). As such, GLD (NYSE:GLD) currently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Gold Trust ETF (AX:IAU)

This ETF seeks to provide exposure to prices of the gold bullion and can be used as a means to attain portfolio diversification or achieve hedging targets.

It has AUM of $9.4 billion and charges a fee of 25 basis points a year. It has returned 10.3% year to date but has remained flat in a year (as of Oct 3, 2017). As such, IAU currently carries a Zacks ETF Rank #3 with a Medium risk outlook.

ETFS Physical Swiss Gold Shares ETF SGOL

This fund aims to track the performance of the gold bullion before fees and expenses and is a convenient way of gaining exposure to the metal.

It has AUM of $1.0 billion and charges a fee of 39 basis points a year. It has returned 10.3% year to date but has gained 0.01% in a year (as of Oct 3, 2017). As such, SGOL currently carries a Zacks ETF Rank #3 with a Medium risk outlook.

Another way to gain exposure to the metal is through ETFs investing in commodity futures. Let us discuss one such ETF.

PowerShares DB Gold Fund (WA:DGL)

This fund is appropriate for those looking for a cost-efficient way to invest in commodity futures. It seeks to match the performance of DBIQ Optimum Yield Gold Index Excess Return and generate return from the fund’s collateral holdings primarily consisting of safe government securities before fees and expenses. However, since this fund invests in the futures markets, it is not deemed suitable for all investors owing to the highly speculative nature of the investments.

It has AUM of $194.3 million and is relatively expensive as it charges a fee of 78 basis points a year. It has returned 9.3% year to date but has lost 1.1% in a year (as of Oct 3, 2017). As such, DGL currently carries a Zacks ETF Rank #3 with a Medium risk outlook.

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