If you want to invest in gold without lugging actual gold bars around, what should you buy?
Gold is well known as a time-tested investment and a hedge against the dollar and inflation. Gold has historically been a store of value since it is a rare and finite resource.
If you are interested in gold producers, ETFs are one option to consider to gain easy access to gold. It is perfect for investors who enjoy the materials sector. Find out more in this iShares XGD ETF Review.
Commodity Exchange-Traded Fund
BlackRock iShares XGD is an Exchange-Traded Fund (ETF) that provides you with exposure to the largest North American gold producers trading on the TSX.
- Low Price
- High Liquidity
- Invests in large producers
- High volatility
- High risk investment
XGD is a gold index ETF offered by Blackrock on the Canadian stock exchange TSE. The commodity investment is intended to provide long-term growth through replicating the S&P/TSX Global Gold Index, less expenses. It focuses primarily on gold producers, not gold itself, with a global perspective.
XGD provides exposure to producers of gold and relevant products at a global level. The fund’s goal is to provide long-term capital growth by replicating the S&P/TSX Global Gold Index, less expenses.
Accordingly, the fund is nearly completely invested in equities and has no exposure to bonds or similar fixed income securities.
What is the XGD ETF’s asset allocation?
The fund is nearly entirely invested in equities, with a majority of its focus on Canadian equities and minority interests in U.S and international equities.
What are the XGD ETF’s top holdings?
Their top three holdings, Newmont (NEM), Barrick Gold Corp (ABX) and Franco Nevada Corp (FNV), make up about 47% of the ETF’s total holdings.
Newmont is one of the world’s largest gold miners, with operations worldwide. They are known for being the only gold company on the S&P 500.
Barrick Gold Corp produces gold and copper in 13 countries. They were the largest gold mining company in the world until Newmont bought Goldcorp in 2019. Their current CEO wishes to exchange their stock on the S&P 500 in the near future.
Franco Nevada Corp is a Canada-based company that is traded on the TSE and the NYSE. Newmont actually used to own Franco Nevada from 2002 to 2007.
Nearly all of XGD’s holdings are composed of stocks in the Materials sector.
The fund’s geographic exposure is 68% in Canada and 24% in the United States.
The current management fee is 0.55%. The current expense ratio is 0.61%. While it may seem high, these fees are comparable to similar sector ETFs.
On July 31, 2021, The average annual performance of the ETF was -21.48% for 1 year, 20.04% for the 3 year, 2.88% for 5 year and -1.39% for the 10 year, relative to the benchmark. Since its inception, the return has been 5.73%.
XGD had a sharp decline in 2010 after the 2008 Great Recession, a decline it mostly recovered from by early 2020.
Is XGD a good gold investment?
This is because during 2020, gold had risen 35% from mid-March to early August. XGD rose over 85% in that same time period.
On 8/18/21, the market closing price of XGD was $17.58 CAD. The year range of the ETF was between $16.69 and $25.09.
This suggests a high potential upside since the ETF is currently at a relatively low point from a 52-week perspective. That alone is a possible signal that it is a good buying opportunity since it is decently off its 52-week high.
Morningstar’s Factor Profile highlights the ETF’s current emphasis on lower yields, low momentum, high quality, high volatility, high liquidity and small size. These characteristics may not fit investors who are seeking high growth. Additionally, the high volatility indicates that the ETF may present more risk than what it’s worth.
Morningstar also compares XGD against the category average and the index amid various Style Factors. Across the board, including Price/Earnings, Long Term Earnings, Price/Cash Flow and more, XGD performs very similarly to the category average and the index.
XGD’s dividend yield is notably higher than the category average but unremarkable compared to the index.
Blackrock lists XGD with a high-risk indicator. This corroborates the high volatility noted by Morningstar.
XGD vs ZGD
ZGD is a global gold ETF offered by BMO. It closely replicates the Solactive Equal Weight Global Gold Index with less expense. Similar to XGD, ZGD focuses on global gold mining equities.
BMO has ZGD designated with a high-risk rating.
ZGD holds numerous equities. Its 35 assets are all roughly weighted equally. Some of their holdings include WDO, KNT, FNV, EDV and OGC.
Nearly all of their holdings are materials, with 63% based in Canada, 12% from the US and the rest from various other countries.
The maximum annual management fee is 0.55%. The management expense ratio is 0.61%. These are the same as XGD’s rates.
As of 8/18/2021, it is at the near bottom of its 52-week range. It is at $65.40, whereas the 52-week range is between $64.08 and $95.40. Interestingly, Morningstar rates ZGD at two stars versus XGD at three stars.
Performance-wise, the fund has performed in a lukewarm fashion from its inception to date.
Morningstar’s factor profile describes ZGD as a somewhat growth ETF with low yield, low momentum, high quality, high volatility, high liquidity and a small size. It has similar style measures to its category average and the index, except for its historical earnings % and its book-value growth %.
ZGD’s historical earnings % is about 7% higher than both the category average and the index, at 41.15%. Its book-value growth % is about 8% lower than the category average and the index, at 0.34%.
Morningstar describes XGD and ZGD as small, though ZGD has nearly $1.5 billion in net assets versus ZGD’s $240 million in net assets. The note about high volatility is fair since the annualized performance of the ETF for 1 year was -23%, 15% for the 2 year, 19% for the 3 year and 1.3% for the 5 year, relative to the index. Since inception, the ETF has returned close to 0%.
It appears that ZGD is very similar to XGD overall, with high risk, a strong focus on materials and relatively low market prices. However, ZGD appears to be more highly diversified in terms of its holdings and, to some extent, in its geographic allocation.
Despite the heavy diversification in ZGD’s holdings, it is still considered to be a high-risk ETF by both BMO and Morningstar. It seems that Blackrock prefers to focus on the big players, as their biggest holdings coincide with the gold producers with the highest market caps. Newmont, Barrick Gold and Franco Nevada total to over $100 billion in market cap.
Is XGD a Better Investment, or ZGD?
I would personally not prefer such high-risk investments with high volatility, but ZGD’s rock bottom price relative to its 52 -week high is intriguing.
If one is going for the price relative to the 52-week high, I would personally prefer ZGD if I were to pick a gold investment. Either way, both ETFs appear to be very similar to each other, so trying to decide between the two may not be necessary.
If one is chasing growth or high return in either ETF, it appears that one will have to properly predict gold’s trend to try to ride gold either down or up since the long-term returns of both ETFs are unremarkable. In other words, the high volatility in both ETFs could present opportunities to the right investors who can take advantage when the volatilities are present.
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In sum, XGD represents a possibly cheap ETF with material risk and high volatility. I am not sure it is wise to accept so much risk and so much volatility compared to possible non-gold investment options.
Granted, if you strongly believe in gold producers, this is a good way to gain exposure to them.
Overall, XGD is an easy and good way to gain exposure to gold producers in Canada. If your intention is to hedge against inflation, then it could be a good investment for you.
Be aware of its high-risk rating, and proceed cautiously by not investing a big proportion of your portfolio into it.
Learn more about the best ETFs in Canada here.