The equity markets have been hitting record highs, but many investors are wary of any potential short-term, risk-off events that could trigger a sudden pullback. Consequently, investors may consider an alternative ETF strategy to hedge unseen risks.
Some have looked to gold as a hedge against market volatility, and a instead of taking a position in two separate assets, investors can diversify their portfolios with a kind of two-in-one gold and equity strategy.
As a way to hedge uncertainties in a capital efficient way, investors may consider something like the actively managed REX Gold Hedged S&P 500 ETF (NYSEArca: GHS). GHS allow investors to access exposure to gold without diminishing their equity allocations, essentially providing investors a two-in-one, gold-and-stock position in an ETF wrapper.
“Investors are always looking for ways to diversify their portfolios without sacrificing long-term growth potential. If the outlook on bonds isn’t rosy and stand-alone gold positions are sapping too much allocation, a layered gold strategy could be an ample alternative,” according to REX Shares.
Gold is a good diversifier as a tail hedge, but investing in the asset will make one incur opportunity cost of investing in something else. Gold may help the overall performance of a portfolio if there was a substantial drawdown during a period, but if there wasn’t, the unneeded hedge could end up costing an investor.
Related: What Has Made Gold ETFs a Great Long-Term Investment
When investors try to hedge gold on their own, they may have poor timing, often getting in our getting out of the position during the worst periods possible. On the other hand, the gold hedged S&P 500 ETF will take a 100% position in gold futures along with 100% in equities, allowing investors to enjoy the long-term benefits of both gold and stock growth while also gaining exposure to the negative correlation between the two assets to diminish portfolio risk during short-term bouts of volatility.
Through this layered gold portfolio approach, investors may find that there is a much lower opportunity cost for protection than a dedicated gold position.
So far this year, GHS’ dual gold and equity strategy has been outperformed, rising 24.4% year-to-date, compared to the 14.7% gain in the S&P 500.
For more information on the gold market, visit our gold category.