Hybrid Gold


Actively managed hybrid gold ETF from iShares

It’s almost as if they’re trying to time the market. Right in time for the potential bear market iShares is rolling out a gold tracker. The iShares Gold Exposure ETF (GLDF) will seek to provide total return exposure to gold, while partly avoiding the ETC structure that’s usually used for total return gold products.


To do this, GLDF will invest in two things:

1.     a physically-backed gold ETP;

2.     Derivatives that correlate with gold


In order to get a total return, GLDF “aims to generate interest income… through a cash management strategy consisting primarily of cash and cash equivalents,” the prospectus says. This strategy and the derivatives exposure (mostly gold futures) will be actively managed.


Interestingly, GLDF does not have to invest in BlackRock’s ETPs. The prospectus says it can invest in products issued “by an unaffiliated entity”. But one imagines BlackRock will stick with its own IAU product (why bring in assets only to bleed them?).


Analysis – personally, I’d stick with physical gold

Gold ETPs fall into two categories: those that hold bullion (physically backed) and those that use gold futures contracts. Physically backed gold products are the overwhelming favourite among investors and for an obvious reason: they’re perfect.


Physically backed gold ETPs are guaranteed to track their underlying because they have a legal claim to allocated bullion. And because they’re stored with bank custodians there is very little security risk. Making things better, in a worst-case scenario, investors can request the delivery of gold bars for some products, like ETF Securities’ Gold Bullion Securities (GBS) on the London Stock Exchange.


So foolproof are physically backed gold ETPs that they’re popular all around the world – even in sub-Saharan African countries where they have very little exchange activity, small capital markets and virtually no ETFs to speak of.


BlackRock knows all this, of course. It’s physically backed gold tracker IAU has several billion under management. Which raises the obvious question: why are they listing a gold tracker that builds in derivatives?


One suspects this owes partly to performance. As ETF Securities experience shows, tracking gold on a total return basis can at times lead to better (in effect, leveraged) returns. (Hit up BULP:LN on Bloomberg). This is more or less said outright in GLDF’s prospectus: “Investing in derivative contracts may have a leveraging effect on the Fund.”


And such a product that offers enhanced commodity exposure may be something appealing to investors as the decade-long bull market finally winds down.


But it also has drawbacks. One is contango, which is a permanent feature of the gold futures market owing to storage costs. And while BlackRock may actively manage futures rolls, active management will not flip the curve. Another is counterparty risk – derivatives have counterparties that can default, physical gold does not. In fact, its aversion to counterparty risk is half the reason investors like gold. 

Still, it will be interesting to see how iShares new hybrid goes.