Friday, 27 May 2016

Should we invest in a Gold ETF?

I was reading this guest post by Kim Iskyan on BIGfatpurse about 3 Good Reasons You Should Own Gold. It got me thinking about whether we should include Gold in our portfolio.

Correlation between asset classes in our portfolio

From our asset portfolio, there is a strong correlation between the ETF and Share portfolios since the Global and Singapore stock markets tend to move in the same direction. However, they have low correlations with our Cash, Wholesale Life Policies and Bonds portfolios. Given the size of the ETF & Share portfolio and the Other portfolio are about the same, this has helped to lower the volatility of our asset portfolio.


I do agree with the article's view that since stock markets and Gold have little correlation, Gold would be a good hedge for our portfolio and offers protection when stock markets fall. We have considered adding an exposure to Gold in our Other Portfolio before for the same reason, specifically via the SPDR Gold Shares ETF on the SGX. However, we have been deciding against it so far mainly for this reason.

No distributions

The equity and bond ETFs in our portfolio have annual, bi-annual, quarterly or monthly distributions. This works to our advantage due to the way we re-balance our ETF portfolio. Instead of selling out-performing ETFs to buy under-performing ETFs periodically, we build up our cash holdings and allocate more of it to buying the under-performing ETFs.

Since this reduces the need to sell out-performing ETFs, the turnover in our ETF portfolio is lower and we hold on to the ETFs for longer. Hence, the distributions are a good source of passive income and increase with the size of the ETF portfolio.

The Gold ETF does not have distributions and it will require us to actually sell and buy the Gold ETF to take advantage of price increases and decreases for rebalancing purposes. There is little benefit in holding on to and not selling the Gold ETF for the long-term without regular distributions.

Protection against degradation of paper currency

I also agree with the article's view that gold can preserve value in a way that paper money can't. This is an important consideration in the current era of quantitative easing by central banks around the world.

For our asset portfolio, we would probably start to invest in a Gold ETF after the size of our ETF & Share portfolio grows to be significantly bigger than our Other portfolio. It only makes sense then to introduce another low correlation asset class exposure to better manage the volatility and try another rebalancing method.

By the way, we went to Seoul (South Korea) over the weekend and it's a great place for shopping, eating and sightseeing. Personally, I still prefer visiting Japan and have been to Tokyo, Kyoto and Osaka for our honeymoon as well as Sapporo and Niseko for a ski holiday. Maybe it's because I'm more used to the sights, sounds and cuisine in Japan.


Anyway, I like including our leisure travel destinations in the blog posts just to make things more interesting. After all, one of the main motivations of improving our personal finances is so we have more money to travel around the world.

2 comments:

  1. are there actually any gold etfs that pay divid?

    then, there is the US oil fund, which has the biggest fund size, but has 0.7+ ER. not sure if its worth. still sitting on the fence for getting vested in gold etf..

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    1. I haven't found any gold ETFs that pay distributions. After all, these gold ETFs wouldn't be receiving any income themselves to be able to pay distributions. Yeah, I'm undecided about this too!

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