NEWSLETTER
Image source: Getty Images
Exchange-traded commodities (ETCs) can be a great way to gain exposure to a particular asset or group of assets that I would find difficult to access as a normal retail investor. They are not necessarily passive in nature and can actually provide me with a great upside to my overall portfolio. This is an example that I like at the moment and has far outperformed the others. FTSE 100 Index In recent years.
Sharing the details
I mean the iShares Physical Gold ETC (LSE:SGLN). To be clear, an ETC is very similar to an ETF, in the sense that it is traded on a stock exchange. The main difference is that ETCs typically track the performance of commodities, while ETFs focus primarily on stocks.
As the name suggests, this ETC offers investment exposure to physical gold – the company that manages it owns the gold. Over the past five years, the share price has risen by an impressive 52%. This contrasts with the FTSE 100, which has gained 17% over the same period. Over the past year, the ETC has risen by 27%.
Sure, I could go out and buy a gold bar myself. However, storing and trying to find a buyer for my gold when I want to sell it can be a hassle. With the ETC, I can buy and sell it very quickly, just like a normal stock. I also have the flexibility of how much I want to buy.
Reasons for superior performance
Gold has enjoyed a few good years. During the pandemic, many central banks cut interest rates to low levels. This meant that the opportunity cost of owning gold fell significantly. What I mean by this is that gold does not pay interest or dividends. Therefore, when interest rates rise, investors may prefer to get rid of gold and earn interest in cash. However, during the pandemic, it was the opposite, so investors preferred to invest in the precious metal.
Even though interest rates are now at higher levels, gold has continued to outperform over the past year. This is because investors have bought it as a defensive asset. As we have seen so far in 2024, there has been a continuation of wars, new conflicts in the Middle East, electoral uncertainty and some concern about the global economy. This concern is being reflected in people buying gold.
One risk to future performance is that we enter a period of booming economic growth and positive investor sentiment. This could lead to a fall in the price of gold (and gold stocks) as people invest money in riskier assets to earn higher returns.
The next few years
I think allocating some of my spare cash to gold for the next few years is a smart move and something I am considering doing.
I can't predict the future. While I believe the stock market will rise in the coming years, I can't be sure of that. Therefore, maintaining some exposure to gold should protect me in case I'm wrong.
Another reason I think the outperformance could continue is that many governments and central banks are looking to shift their reserves out of the US dollar and into other assets, such as gold. This change of direction in the coming years could lead to a lot of demand from these big buyers.
