The index is also rebalanced to equalize notional exposure to equity and gold after the close of the first business day of September, if the difference between the values of the gold futures exposure and the equity exposure is more than 10% above or below the value of the index as of the last rebalancing, or if the sum of the equity return and gold futures return since the last rebalancing is more than 20% or below -20%. Source: http://us.spindices.com/indices/strategy/sp-500-dynamic-gold-hedged-index
To summarize, the index will normalize back to a 1:1 exposure once the gold and/or equity exposure gets too far unbalanced. Below is a chart of the relative performance of the dynamic vs ‘non-dynamic’ index since incept in 1998.
The dynamic index has led to about a +21% differential over this period. You can also see where the benefit came into play in particular during the 2008 bear market.
A couple other differentiating points between GHS and SPGH are:
- GHS is an ETF, whereas SPGH is an ETN. GHS will not have the additional counterparty risk inherent in the ETN structure, along with the other differentiating factors that favor ETFs.
- GHS has a (gross) expense ratio of 0.48%, whereas SPGH runs at 0.85%.
FTSE Emerging Market Gold Hedged
As I mentioned previously, the advent of currency-hedged ETFs is not a new phenomenon. However, these ETFs will naturally hedge the currency exposure back to the US Dollar (i.e., long the US Dollar and short the currency or currency basket). This may or may not be advantageous given the increasing currency ‘manipulation’ occurring around the globe. As mentioned the REX offering allows for a Gold overlay, which takes the US Dollar out of the equation relative to other currency-hedged offerings. Since the underlying equity exposure itself is not currency hedged, an investor will be long both EM currency and gold exposure.
Gold: Asset Class or Currency?
One question an investor needs to ask when analyzing the new REX offerings is whether Gold should be treated as an asset class or a currency. In a traditional allocation where other asset class exposure must be reduced to accommodate a gold exposure, gold is hence treated as its own asset class. In the REX structure where gold exposure is overlaid onto other existing exposure (in this case S&P 500 or Emerging Markets), it is essentially treated more as a currency than a separate asset class. In the overlay case, the diversifying effects of gold as an asset class are mitigated since other exposures remain. However, the tradeoff to this is there are diversifying effects versus the currency exposure inherent in an existing asset allocation. While I am not here to argue against the benefits of gold as a separate asset class, there may be room in an allocation for both gold exposures, especially in this time of central bank currency manipulation.
Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.
[related_stories]The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not necessarily reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice.