King argued that the main point of gold-hedged equity is to help investors meet capital efficiency, along with avoiding market timing and hedging equity exposure.
“The idea here is to illustrate the concept of freeing up investment dollars in the portfolio,” King said.
For instance in a $100 portfolio, if $3 is invested in gold and $20 is in S&P 500, then investing $3 from the S&P 500 ETFs to a gold hedged equity strategy and selling $3 of gold would allow an investor to invest $3 from the sale of gold for other purposes.
Some investors, though, may be holding steadfast with traditional stocks and bonds, but including an alternative asset may help diversify a portfolio and generate a better risk-adjusted return. For instance, the rolling one year correlation of gold with the S&P 500 averaged between -0.32 and 0.32 over the past 25 year period – a -1.0 reading means perfectly uncorrelated and a +1.0 reading reflects perfect correlation. On the survey of financial advisors, 18.9% indicated they always maintain core gold holding.
“Randomness of returns leads to diversification,” Will McGough, Senior Vice President and Portfolio Manager at Stadion Money Management, said.
Financial advisors who are interested in learning more about a gold-hedged equity strategy can watch the webcast here on demand.