Using Gold-Plus Approach to Fight Inflation | ETF Trends

Recent readings of the Consumer Price Index (CPI) indicate that while inflation is trending lower, it remains elevated relative to historical norms and well above the Federal Reserve’s desired 2%.

As a result of persistently high inflation, it’s not surprising that many advisors and investors are turning to asset classes with inflation-fighting reputations. One of the most frequently embraced options on that front is gold and the related exchange traded funds, including the SPDR Gold Shares ETF (GLD) and the lower-cost SPDR Gold MiniShares (GLDM).

There’s no denying that gold ETFs are delivering for investors this year. GLD, the world’s largest bullion-backed ETF, resides around 52-week highs and is up 10.72% year-to-date, as of April 5. However, investors can add more inflation protection to portfolios while potentially enhancing returns while mixing gold assets with natural resources equities, observed Maxwell Gold, head of gold strategy at State Street Global Advisors (SSGA).

“The combination of gold with natural resources is an attractive option for portfolios because it may also improve a diversified portfolio’s Sharpe ratio,” noted Gold. “Gold’s diversification and risk-management characteristics coupled with the inflation-sensitive characteristics of natural resources show improved Sharpe ratios, whether allocations to this mix are a percent or two, or perhaps more. While a standalone gold allocation historically exhibits a higher Sharpe ratio, the higher inflation beta from including natural resources may prove valuable against a backdrop of elevated inflation.”

The SPDR S&P Global Natural Resources ETF (GNR) is among the natural resources ETFs that could make for a viable paring with GLD or GLDM. While GNR’s year-to-date return is modest, the strategy of marrying natural resources stocks and gold in a portfolio to ward off inflation has merit. Plus, a strategy such as GNR has compelling history on its side.

“Since November 2002, broad commodities posted a total return of 1.32% with a standard deviation of 16.40%. Comparatively, natural resources posted a total annualized return of 8.60% with an annualized volatility of 20.82%. Translating this to a risk/return layout, natural resources provided a better option than broad commodities with higher return per unit of risk, 0.41 for natural resources versus 0.08 for commodities,” added SSGA’s Gold.

Of note to investors, Gold pointed out that when gold and natural resources equities are paired together on an equal-weight basis, the results are encouraging as annualized volatility decreases while total returns increase relative to deploying these assets on a standalone basis.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.