Gold is a global asset and currency as from time immemorial; it has provided a safe haven for countries and individuals in times of market turbulence.
Another alternative to gold investment is by investing in gold related Exchange Traded Funds (ETFs). Gold ETFs are becoming increasingly popular among investors in Nigeria due to their potential for diversification, liquidity, and ease of trading.
Gold ETF, or Exchange Traded Fund, is a commodity-based Mutual Fund that invests in assets like gold. These exchange-traded funds perform like individual stocks and are traded similarly on the stock exchange.
Exchange traded funds (ETFs) track the movement of a basket of shares of publicly traded gold mining, refining and production companies. Trading or investing in an ETF much wider exposure than from a single position, which makes them a popular way of diversifying a portfolio. ETFs are passive investments, which replicate market returns rather than seeking to outperform them.
Investors tend to rely heavily on gold in times of political or economic uncertainty, and the metal is often used as a hedging tool against inflation or currency devaluation.
For example, gold increased more than 13 per cent between January and May 2020 during the COVID-19 crisis, due to rising market volatility. Investors started pulling money from cash assets in favour of the precious metal in order to combat the political, economic and social instability.
A gold ETF is an ETF that only invests in gold securities or assets. Hence, investing in a gold ETF is a good option for those who want their investments to match the price of gold.
NEWGOLD ETF is a major Gold ETF that trades on Nigerian Exchange (NGX) Limited. It is managed by NewGold Managers Limited backed by Vetiva Capital Management Limited and Gold, is held by custodian Brinks Limited. It tracks current rand price of Gold and trading at N1,708.74 per share as of February 22, 2024.
A stockbroker, Mr. Tunde Oyediran, stated that Gold ETF, or Exchange Traded Fund, is a commodity-based Mutual Fund that invests in assets like gold.
He said that “despite being a commodity-based traded fund, gold ETF funds can be used as an industry exchange-traded fund as well. It is an ideal investment strategy to broaden a financial portfolio and to get exposure in a variety of sectors like gold mining, manufacturing, transport industry, among others. These traded funds are relatively simpler to obtain and provides an easier way to invest in the gold industry.”
He added that the best gold ETFs can also be used as hedge protection against a fluctuating market, which makes them an alternative to insurance in one’s investment portfolio, citing example of investors using short-term exchange traded funds to minimise their loss if the price of gold suddenly plummets.
He further explained that these exchange-traded funds are rated as some of the best defensive assets available in the market, saying that “it is considered to have the same class traits as bonds as many investors use them to insure their investments against economic fluctuations, and in extreme cases, currency debasement.
“The price of gold can rise by a significant margin if major currencies, like dollar, tend to fall weak. Investing in gold ETF can allow an individual to profit from that sudden drop.”
He said that “as gold ETFs are available in variable denomination, it is ideal for all types of investors. One can start investing with as low as 1 unit of traded fund, which represents one gram of gold.”
Benefits of Gold ETFs
Diversification: Gold ETFs offer investors an easy and convenient way to add exposure to gold to their portfolios, which can help diversify their holdings beyond traditional asset classes such as stocks and bonds. Just as gold has a diversification advantage, it can help lower overall portfolio risk.
Liquidity: Gold ETFs are highly liquid, which makes it easy for trading and also makes them a more practical method to invest in gold than purchasing physical gold. Due to the high liquidity, investors can quickly and fairly enter or exit positions in Gold ETFs.
Cost-effective; Gold ETFs have lower costs than actively managed funds, making them a more cost-effective way to invest in gold. This is due to the fact that gold ETFs exempt investors from having to buy and keep physical gold, which can be pricey and come with additional expenses like storage and insurance costs.
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