With prices rising, gold funds are an increasingly significant component of investors’ portfolios.
You’ll have heard plenty of talk during gold’s excellent run about the importance of investing in gold. While allocations vary, most experts recommend allocating anywhere between 2% and 10% of a portfolio to gold, with 5% often being cited as a guideline amount for those unsure where they stand on gold.
Laith Khalaf, head of investment analysis at AJ Bell, says gold “should be seen as a means of diversification for equity holdings alongside bonds and cash, and as such should not normally exceed 5% to 10% of a portfolio”.
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At face value, that might sound like you’re being told to spend up to 10% of your savings on gold bullion, in the form of bars or gold coins. Thankfully, that’s not the only way to gain exposure to changes in the price of gold. Gold funds offer exposure to price movements, without the challenges of storing physical gold.
Gold has gained around 46% over the last 12 months, and much of this price action has been driven by rising flows into gold funds, specifically ETFs and ETCs.
Physical gold ETCs
Physical gold ETCs back the spot price of gold and, crucially, do so by holding physical gold, rather than synthetically replicating its movements.
One to consider is the iShares Physical Gold ETC (LON:SGLN), an ETC that tracks spot gold prices and is reasonably priced with a 0.12% total expense ratio.
There are plenty of good alternatives available, though. In general, gold ETFs (or, technically, ETCs) are a great way to allocate to gold in a stocks and shares ISA, without having to worry about carting piles of gold around.
Physical gold ETCs hold actual gold as their underlying assets – in some respects, shares in a gold ETC represent ownership of this physical gold. There’s two important considerations at play here:
- Where does the gold come from?
- Could I access the gold if I wanted to?
If you are particularly concerned about the ethics of your investments, then that first question is key. Conflict gold has been linked to civil wars and militia groups, and the environmental impacts of mining gold can be substantial. Industry standards exist to limit these social and environmental harms, but it’s important to ensure that any gold ETC complies with these standards.
While gold ETFs and ETCs offer exposure to gold price movements, some might say the investment thesis of gold – certainly in terms of its historical origins as a store of value – boils down to its chemical properties. Proponents of this view would say that being able to access the physical gold you own through an exchange-traded product is vital.
If accessible physical gold is important to you, then The Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAU) is a good one to consider.
Like SGLN, RMAU’s gold is completely London Bullion Market Association (LBMA)-compliant, and the fund targets at least 50% of its underlying gold to be recycled – lessening the negative social and environmental impacts of gold.
RMAU allows shareholders to redeem shares in the ETC in exchange for equivalent amounts of the physical gold, which is stored at the Mint’s highly secure vault in Llantrisant, Wales.
Gold mining funds
Besides tracking gold spot prices, gold funds can also act as funds of gold mining stocks.
Gold mining funds offer a degree of gold exposure, but it’s important to remember that this is a distinct investment from physical gold or gold ETCs. Each holding in a gold mining fund is a distinct company.
The Superpit is Australia's largest open pit gold mine, and one of the largest open pit mines in the world
While gold prices are a key driver of their financial performance, there are other factors at play, including some risk factors (such as the viability of individual mines, or management’s strategy) that are particular to individual stocks. So they don’t necessarily move in line with gold prices.
That said, some interesting gold mining funds include:
- The VanECk Gold Miners UCITS ETF (LON:GDGB), a passive ETF which tracks the NYSE Arca Gold Miners Index, and has a total expense ratio of 0.53%;
- The AuAg ESG Gold Mining UCITS ETF (LON:ESGP), an equal-weighted ETF tracking 25 ESG-screened companies that are active in the gold mining industry and has a 0.60% total expense ratio;
- The L&G Gold Mining UCITS ETF (LON:AUCP) which tracks the Global Gold Miners Index and which reduced its total expense ratio from 0.65% to 0.55% in January;
- The WS Ruffer Gold Fund; this actively-managed fund isn’t cheap, charging a 1.2% annual management charge, but it has outperformed its benchmark, the FTSE Gold Mines TR Index, in three of the last five years and all-time since its inception.
Gold funds with broader exposure
There’s lots to be said for having pure gold exposure in your portfolio, but there are funds that combine gold exposure with other metals.
The Jupiter Gold & Silver Fund gives dual access to gold and silver by investing in listed securities (some funds, some miners) with exposure to gold and/or silver prices. Investing in silver is a slightly different prospect to gold; while both are precious metals, silver prices are more heavily influenced by demand for its industrial applications, rather than its role as currency. The gold-silver ratio tracks the relationship between the two metals.
The BlackRock World Mining Trust’s (LON:BRWM) objective is to provide a “diversified investment in mining and metal assets worldwide”. It offers exposure not only to gold miners but also to other key resources such as copper and iron ore.
Like silver, copper has significant industrial applications in the global economy, so it makes a lot of sense for investors to have some exposure to this metal as well as gold. However, it’s not as sought after as gold as a store of value.
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