Gold has been a refuge for skittish investors for many years. The thinking is that gold is intrinsically valuable and not dependent on factors that influence currency movements like global economics or politics. Unfortunately buying physical gold comes with many challenges – not least of which is storage. If you aren’t keen to keep gold under your mattress (we certainly wouldn’t advise it), but still want a touch of Wild West in your portfolio, the Absa NewGold ETF is for you.
This ETF tracks the movement of the gold price. The value of your investment goes up when the gold price goes up, and down when the gold price falls. For every ETF share sold, the ETF buys 1/100th of a fine troy ounce of actual gold. The physical gold is stored by the ETF issuer, which solves your mattress problem. The storage costs ETF holders 0.4% of their investment every year, but there are no additional fees, which makes it a very cost-effective way to invest in gold.
This ETF also differs from the ETFs we’ve covered so far in a very important way: you can’t invest in this ETF through your tax-free savings account.
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Investing in the Absa NewGold ETF is a great way to protect your portfolio against sudden scary market jolts and rand weakness. The gold price goes up over time, but just like equities, it fluctuates. For that reason, it’s not advisable to hold only this ETF. Hold this ETF as part of a larger portfolio that invests in different asset classes. Also be careful not confuse this ETF, which is invested in physical gold, with ETFs that invest in gold mining companies.
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Weekly expert: Waldo Booysen
Each week, we ask an independent industry expert to tell us more about our featured ETF. Waldo Booysen tells us what sets this ETF apart, what investors should watch out for and who should be buying this ETF.
What sets the Absa New Gold ETF apart from other ETFs?
This ETF is based on a commodity price movements and not underlying shares; the risks are different. The value of the Absa NewGold ETF will always be priced in rands and subject to:
- currency volatility – rand weakening or strengthening
- supply and demand on gold – the higher the demand the higher the price, and vice versa
Since the gold price is derived in dollars, so the ETF is a way to protect against rand weakness.
What limitations should investors be aware of?
If the rand strengthens against the dollar, the returns will be lower, because you’ll receive fewer rands per dollar. Secondly, if the demand for gold declines, the unit price of the ETF will also move downwards, thus impairing the returns. Lastly the ETF isn’t as diversified as a Top 40 ETF, which includes different sectors like industrials, financials and resources. It’s only commodity-based and concentrated only on the gold price. This leaves the risk of the rand strengthening and gold price fluctuations with no protection from other sectors.
What type of portfolio would benefit most from holding this ETF?
The returns are directly correlated to the supply and demand of gold, and this is very volatile over the short term. Studies show that volatility is combatted and almost entirely eliminated over a long time period. If an investor wants to invest in this ETF, a longer time horizon of five years or more is needed.
This ETF is perfect for an investor:
- with a longer time horizon,
- with a higher tolerance for volatility and risk,
- who wants some form of a hedge against rand weakness against the dollar.
Think: clients that are far from retirement with after-tax savings with a long-term view.
Unpacking the NewGold ETF
|ETF JSE code||GLD|
|ETF issuer||NewGold Issuer Ltd|
|Issue date||2 November 2004|
|ETF benchmark||Gold spot price|
|Tax-free savings account||No investment allowed|
|ETF major holdings||Gold bullion|
1 year +3.2%
3 year +15.2%
5 year +23.8%
10 year +172.9%
|What we like||This ETF provides an easy way to diversify your portfolio into different assets|
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