Podcast: Gold’s Record-High Rally
What’s behind gold’s record-high rally? In today’s episode, Portfolio Managers Chris Heakes, Omanand Karmalkar, and your host, Mckenzie Box, identify a few forces supportive of bullion in the short and longer-term. They also discuss three ways to manage market volatility and U.S.-dollar-denominated ETFs.
McKenzie Box is Vice President of Product Management and Strategy at BMO Global Asset Management. She is joined on the podcast by Chris Heakes and Omanand Karmalkar, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, April 3, 2024.
Gold
Gold has had a very strong start to the year, with a few catalysts being talked about in the press. One is the prospect of lower rates because it reduces the carrying cost of holding gold. Gold can also be seen as an inflation hedge. There are several geopolitical risks that can turn into left tail type events, and gold can act as a store of value in that environment. Gold versus equities and bonds has a low correlation, meaning diversification benefits. Including gold into a portfolio, let’s say even 5% within the scope of a balanced allocation can be both additive to returns and reduce risks.
- BMO Gold Bullion ETF (Ticker: ZGLD), BMO Gold Bullion ETF (USD Units) (ZGLD.U), BMO Gold Bullion Hedged to CAD ETF (Ticker: ZGLH)
Low Volatility
Year to date the low volatility factor has lagged versus the broad market on absolute terms. Low volatility is an equity-based strategy that tries to invest in all things being equal, less risky stocks versus higher risk stocks. For example, investing in Sobeys, a grocery company instead of a junior minor. It seeks to accomplish less drawdowns, that puts investors in a better position to have good returns going forward. So it is this concept of winning by not losing, turning every dollar you save during a drawdown into an extra dollar you have to participate when markets start to recover.
- BMO Low Volatility US Equity ETF (Ticker: ZLU) , BMO Low Volatility Canadian Equity ETF (Ticker: ZLB)
Election Volatility
Looking at the options market, there is a volatility premium around October that recognizes the potential risks around election time. Volatility in the fall is something investors may have to manage. Gold can be a way to manage that volatility, when equity markets are correcting you often see gold holding or increasing in value. Buffer ETF are option-based strategies that purchases downside protection on a one year basis. It is an innovative tool to help build protection in your portfolio. And last but not least, BMO long short ETF series include a long portfolio invested in stock that screen well on a multifactor model, but also shorts 50% of the portfolio against stocks that screen poorly, giving you the opportunity to profit during equity market corrections. These are a few options to help hedge potential future volatility.
- BMO US Equity Buffer Hedged to CAD ETF – April (Ticker: ZAPR) , BMO Long Short Canadian Equity ETF (Ticker: ZLSC), BMO Long Short US Equity ETF (Ticker: ZLSU)
US Dollar ETFs
US dollar denominated ETFs or “ETF.U” are not hedged products, it actually trades in US dollars. So you would use your US dollars to purchase the ETF. Any dividends and income, or proceeds should you sell will be received US dollars. This option gives Canadian investors with US dollars the opportunity to invest without having to do any currency conversions. Exchange conversion fees can range from 0.30% - 2.5%, so being able to avoid this is a great benefit. Using a BMO listed US dollar ETF, there is no US estate tax exposure. It is considered a Canadian asset because it trades in Canada, so you do not have to fill out a T1135 tax form.
- BMO US High Dividend Covered Call ETF (US Dollar Units) (Ticker: ZWH.U) , BMO Covered Call Canadian Banks ETF (US Dollar Units) (Ticker: ZWB.U), BMO S&P 500 Index ETF (USD Units) (Ticker: ZSP.U)
Price of gold: Bloomberg, as of April 3, 2024.
Correlation: A statistical measure of how two securities move in relation to one another. Positive correlation indicates similar movements, up or down together, while negative correlation indicates opposite movements (when one rises, the other falls).
Canadian mutual funds and Canadian listed ETFs (even if they invest in U.S. equity or debt securities), are generally not considered to be U.S. assets for estate tax purposes, as long as the Canadian funds are treated as corporations for U.S. tax purposes.
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