Exchange-traded commodities (ETC) can be a great way to get exposure to a particular asset or a group of assets that I’d struggle to access as a normal retail investor. They aren’t necessarily passive in nature and can actually provide me with a great edge for my overall portfolio. Here’s one example I like at the moment that has vastly outperformed the FTSE 100 in recent years.
Sharing the details
I’m referring to the iShares Physical Gold ETC (LSE:SGLN). To be clear, an ETC is very similar to an ETF, in that it’s traded on the stock exchange. The main difference is that ETCs usually track commodities, whereas ETFs focus mostly on stocks.
As the name suggests, this ETC provides investment exposure to physical gold — the company that runs the ETC actually owns the gold. Over the past five years, the share price has risen by an impressive 52%. This contrasts to the FTSE 100, which has gained 17% over the same period. Over the past year, the ETC has risen by 27%.
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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 the outperformance
Gold has enjoyed a strong few 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 doesn’t pay any interest or dividends. So when interest rates rise, investors might prefer to ditch gold and earn interest on cash. Yet 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 last year. This is because investors have bought it as a defensive asset. As we’ve seen so far in 2024, there has been the continuation of wars, new conflicts in the Middle East, election uncertainty, and some concern about the global economy. This concern is being reflected in people buying gold.
A risk to performance going forward is if we enter a boom period for economic growth and positive investor sentiment. This could see the gold price (and gold stocks) fall as people invest the money in more risky assets for higher returns.
The next few years
I do think that allocating some of my spare cash to gold for the coming years is a smart play and something I’m looking to do.
I can’t predict the future. Even though I believe the stock market will rise in the coming years, I can’t be sure of it. Therefore, holding some gold exposure should protect me in case I’m wrong.
Another reason why I think the outperformance could continue is that many governments and central banks are looking to move reserves away from the U.S. dollar and towards other assets, such as gold. This pivot in the next few years could see high demand from these large buyers.
