How Gold ETFs Fit in a Diversified Portfolio

Most stick to stocks and bonds and call it a day, but by sprinkling in a little bit of gold or related exchange traded funds, long-term investors can diversify holdings, enhance risk-adjusted returns and diminish drawdowns during down markets for a smoother ride over the long haul.

“We saw in our case study that adding a 2% to 10% strategic asset allocation to GLD in a hypothetical multi-asset portfolio between January 1, 2005 and December 31, 2016 would have improved risk-adjusted return and reduced maximum drawdown compared to the portfolio without any exposure to gold-backed investments,” State Street Global Advisors’ SPDR ETF strategists, led by George Milling-Stanley, said in a research note, revering to the popular gold ETF play, SPDR Gold Shares (NYSEArca: GLD).

With the advent of easy-to-use ETFs that track various asset classes, many are re-evaluating the the balanced stock-and-bond funds of the past. Since the global financial downturn, more have realized the benefits of holding a truly diversified multi-asset portfolio with alternative assets like gold, which has historically low or negative correlation with most other asset classes. The yellow metal has helped investors counter volatility, especially during periods of uncertainty, to help smooth out the ride.