iWeb gold ETF question

northbob

iWeb charge 1.5% on all USD funds for currency transactions.

GBP funds iWeb offers:

DB Physical Gold GBP Hedge ETC - XGLS (TER 1.00%)
Description states "The investment seeks to replicate, net of expenses, the gold spot price." No mention of holding physical gold despite what the name implies. The Legal Structure is "Collateralized Debt Instrument". Is this a 'synthetic' ETF?

The only reasonable TER GBP fund is:
ETFS GBP Daily Hedged Physical Gold ETC (GBP) GBSP (TER 0.39%).
Description states: "tracks the MS Long Gold British Pound Hedged Index".
But the performance to date seems to have no relation to the benchmark let alone the spot price of gold:
1 Year Fund 13.62% Benchmark 34.81%
3 Years Annualised Fund -8.30% Benchmark 6.56%
Any idea what this fund is supposed to be replicating? For a gold allocation it does not look fit for purpose.

Does anyone else use iWeb and has a gold ETF in GBP - have I missed something? Or is only choice on iWeb to pay their 1.5% currency costs per trade on the USD funds to track the spot price?

Thanks.

themanfromamarillo

I'm on iWeb and I've got a small amount of my portfolio in PHAU Physical Gold. It's priced in dollars but traded in London, don't remember paying a foreign currency charge but you could check.

northbob

themanfromamarillo wrote: »

I'm on iWeb and I've got a small amount of my portfolio in PHAU Physical Gold. It's priced in dollars but traded in London, don't remember paying a foreign currency charge but you could check.

I will check with them. When I asked them previously about the USD EFTs they said they charged 1.5% as per their price tariff http://www.iweb-sharedealing.co.uk/charges-and-interest-rates/charges-for-all-trading-accounts.asp

I will ask - their price list says the 1.5% applies to 'international trades' but all their ETFs are purchased on the 'UK Equities' screen - there are other screens for 'International Equities' and 'Funds'.

bowlhead99

northbob wrote: »

DB Physical Gold GBP Hedge ETC - XGLS (TER 1.00%)
Description states "The investment seeks to replicate, net of expenses, the gold spot price." No mention of holding physical gold despite what the name implies. The Legal Structure is "Collateralized Debt Instrument". Is this a 'synthetic' ETF?

As implied by the name, this is a hedged product.

So it does 'seek to replicate' the gold price, but the return of gold depends very much on what currency you are buying it in. Investors in this product are deliberately seeking a hedged product because they don't want it to deliver the performance of the GBP gold price, they want it to deliver the performance of the USD gold price periodically hedged back to sterling so the percentage return they experience is closer to what a US person's percentage return would be. In other words if the gold price goes from $1000/oz to $1300 they want to get 30% return on their money, even though an ounce of gold measured in sterling might only be going up by 6% from £800 to £850 as the fx rate moves from 1.25 to 1.53.

It is a deliberate choice to use a 'hedged' product to get the 30% return instead of the more natural 6% return that a GBP investor would get from buying a block of gold to keep in his living room while the prices and fx rates changed as above. This ETF is not simply a block of gold priced in sterling. It is a block of gold overlaid with a currency contract so that if the dollar strengthens or weakens versus sterling, the effect of those fx changes on your returns is minimised.

When you say, "no mention of holding physical gold" it depends where you are getting your facts from. According to db's factsheet(http://etc.deutscheam.com/GBR/ENG/Institutional/Downloads/ISIN/Factsheets/GB00B68FL050), it holds physical gold, and:

Physical Replication
db Physical Gold GBP Hedged ETCs are backed by a direct investment in the underlying physical gold. The issuer has direct and sole ownership of the gold which is stored in secure vaults in London. Each physical ETC security entitles the holder to a specified quantity of gold (the “Metal Entitlement”) of the segregated pool owned by the issuer. db Physical Gold GBP Hedged ETCs combine the advantages of physical gold ownership, e.g. exposure to gold spot prices and minimal counterparty exposure, with the liquidity, transparency and ease of execution typical of exchange traded products. Settlement of the ETC’s will be in cash.
Currency Hedging and Limited-Recourse Assets
The db Physical Gold GBP Hedged ETC facilitates GBP-based investors to gain exposure to the underlying gold while minimising the impact of the GBP/USD exchange rate risk. The hedging is carried out on a daily rolling basis. In respect of each series of ETC securities, the underlying physical gold (Secured Property) is owned by the issuer and held through the secured account custodian. It is further secured in favour of the trustee on behalf of the security holders. Each series of ETC securities will have recourse only to the respective Secured Property (i.e. ring-fenced).

You ask 'is this a synthetic ETF'. When you are looking at an ETF that tries to deliver the return of a stock index the main choices are for the ETF to hold the actual shares of all the companies at the right times and proportions to mirror the index effectively (physical), or simply to have a bunch of swap contracts in place with someone where they get paid out on the contracts a return that matches what they could have got by holding the shares, less costs (synthetic)

Physical replication in this case means a chunk of real gold in a vault supporting the assets of the fund, rather than merely a paper contract. However, investors in this hedged product do not want to solely experience the change in value of that pile of gold as a 100% equity owner of the gold - they want that overlaid by fx contracts which, if nothing goes horribly wrong, allows the fund to sell dollar disposal proceeds of the pile of gold and receive sterling at an FX rate which has been contracted and hedged to reduce the effect of currency changes over time.

So it is a pile of gold overlaid with a bunch of contracts. Legally it is not pure direct ownership of gold by itself because investors in the hedged product do not want the result of purely owning the gold by itself. Inherently your position is that of holding a debt instrument which promises to pay you a certain amount and is supported by some assets as collateral - a 'collateralised debt instrument'.

So, you can probably think of it in layman's terms as being 'synthetic' because it is trying to replicate the result of 'gold plus a load of paper contracts', which is inherently a theoretical or synthetic construct.

But, they do have allocated gold in a vault, and holding "actual gold, plus paper contracts for the currency bit" is as close as you can get to the result of "actual gold, plus paper contracts for the currency bit", right? So they can say the underlying assets are 'physically replicated', even though the returns are not what you get from a much-less-complicated holding of physical gold with no currency gubbins.

The only reasonable TER GBP fund is:
ETFS GBP Daily Hedged Physical Gold ETC (GBP) GBSP (TER 0.39%).
Description states: "tracks the MS Long Gold British Pound Hedged Index".
But the performance to date seems to have no relation to the benchmark let alone the spot price of gold:
1 Year Fund 13.62% Benchmark 34.81%
3 Years Annualised Fund -8.30% Benchmark 6.56%
Any idea what this fund is supposed to be replicating? For a gold allocation it does not look fit for purpose.

Like the DB fund, it is replicating the results of physical gold hedged back to sterling, for those investors who want to achieve the returns that dollar investors in gold would receive. As they say in their factsheet(https://www.etfsecurities.com/Documents/6747%20-%20ETFS%20GBP%20Daily%20Hedged%20Physical%20Gold%20-%20LSE%20-%20GBX%20-%20EN.pdf):

The product enables GBP investors to gain exposure to the gold spot price with a daily currency hedge against movements in the GBP/USD exchange rate

In the last year or so the USD price of gold did not go below $1000 and last October it was comfortably over $1100. It is now just under $1300. So, the expected return in dollars could not possibly be in excess of 30% and you should not expect a hedged fund, which intends to deliver that 'dollar' performance, to deliver anything like 30%+, even before fees and running costs, it should be much less. The benchmark they are actually aiming for is their Morgan Stanley daily hedged gold price index (less fees and expenses). However, the 'benchmark' that you listed above says almost 35% for the year, which ain't gonna happen if the price only moves from $1100-1200 up to $1300 and the fx effects are mostly hedged away.

That 'benchmark' is probably the pure return of gold in sterling. A year ago gold was about £750/oz and now it's £1000. This is a 30%+ return, much more in percentage terms than the dollar return, and driven by the fact that pounds are now relatively worthless following the Brexit vote announcement. A sterling investor is up significantly more, for holding a block of gold, than a dollar investor is. The ETFS and DB products you highlighted are not trying to deliver the percentage result of being a sterling investor in gold, they are deliberately hedging to try to deliver the percentage result of being a dollar investor in gold.

As such, when it says 3 year annualised return is negative for the fund, but positive for the 'benchmark', that is because the benchmark is not a very good benchmark for what the fund is trying to do, because the fund does not want to deliver you the return of being a GBP investor in gold. Over 3 years, gold went up in GBP (~£800 to £1000) but was flat or down in USD (~$1300 to $1275), and it is that performance from the perspective of being a dollar investor (i.e. making a loss...) that the fund is trying to deliver.

Does anyone else use iWeb and has a gold ETF in GBP - have I missed something? Or is only choice on iWeb to pay their 1.5% currency costs per trade on the USD funds to track the spot price?

When doing your research, don't confuse the fact that you would like to buy a product which holds foreign valued assets PRICED in pounds, for admin convenience to avoid a one-time fx conversion cost on buying and again on selling... with a product that holds foreign-valued assets whose returns are HEDGED TO pounds and eliminate a large amount of the effects of changes in currencies between countries. The change in currencies can be a significant part of your return (or your losses).

If you want 'normal' exposure to the dollar/gbp rate and do not want someone to try to hedge that effect away for you, it sounds like both of the above products are unsuitable because they are hedged. You can just buy any gold ETF that does not say that it's hedged, and should find a range of choices.

I don't hold a pure gold ETF but I do have a 'precious metals' basket ETF which is about 50% gold plus silver, platinum and palladium. Commodities are speculative as they do not produce income, so are a gamble on someone paying more per ounce in the future than they do today. As such, in deciding to put them in my portfolio as a diversifier from equities, debt, real estate, etc, I don't profess to know more about the direction of movement of gold than the others, which can be quite different from time to time. So I have a mixed basket.

Anyway the ETF I use for that is ETFS Physical PM Basket , listed in two forms on london stock exchange: ticker PHPM for the one priced in dollars and PHPP if you want to pay in pence and avoid your broker's FX fee. The version priced in pence is not 'hedged' so just delivers basically the same return as you would have got buying dollars with your sterling, buying the dollar priced fund, and later selling the fund and buying sterling with the dollars received

EdGasket

Just buy SGLN, priced in GBP, and as its an ETF, there should be no platform charge. It will of course vary in value with both the gold price and GBP/USD rate.

northbob

EdGasket, thank you.

I wanted that ETF but iWeb do not offer SGLN, only the USD pair IGLN. So the 1.5% fee was a question. But I have checked with iWeb and they confirm that their 1.5% currency transaction fee does not apply to USD ETFs.

bowlhead99, thank you for such a comprehensive answer. Shame it is not possible to click a 'Thank You' button with additional bonus thanks as some answers really deserve it.

northbob

Thinking about this.

I had not considered the merits of using an ETF that is hedged to GBP. But is there not a very strong case for choosing a hedged to GBP product like DB Physical Gold GBP Hedge ETC? This is my thinking:

1. Diversified portfolio theory is based on historical asset prices for stocks, bonds, gold etc.
2. The gold element is a diversifier away from stocks and bonds.
3. The historical uncorrelated price movements for gold v other assets are based on the historical USD price.
4. So if gold is to perform it's function optimally, it needs to return USD changes in value.
5. Holding a gold fund priced in GBP gives a random result (in that it is not fulfilling the same returns that the underlying portfolio theory was based on)
.
Looking at is another way, if equities fall 40% and investors pile into gold as a safe haven and gold goes up 20% from $1,000 to $1,200, then the balanced portfolio has mitigated equity losses as is the theory. But if holding gold priced in GBP means that currency fluctuations have returned a loss of -10%, then holding gold hasn’t served its purpose. It may return a profit if currency moves favourably, but that’s just speculation, not investment principles.

I am not saying portfolio theory always works, and assets always move according to theory. But hopefully the point and question I am asking is clear.

Thanks for your thoughts.

bowlhead99

northbob wrote: »

1. Diversified portfolio theory is based on historical asset prices for stocks, bonds, gold etc.

Agreed

2. The gold element is a diversifier away from stocks and bonds.

Agreed

3. The historical uncorrelated price movements for gold v other assets are based on the historical USD price.

Stop. This is where you have veered off track. That sentence just depends in whose book you read it first.

If you are a US writer you will look at all your tables of historic returns in USD terms and you will say that gold was diversified from stocks and bonds.

If you are a UK writer you will look at all your tables of historic returns in GBP terms and you will say that gold was diversified from stocks and bonds.

If you are a German or Japanese writer you will look at all your tables of historic returns in EUR (previously DM) or JPY terms and you will say that gold was diversified from stocks and bonds.

So this idea that gold is only a diversifier in a portfolio if you get fed its daily price in dollars but it is not a diversifier if the price chart is drawn in pounds, is a nonsense. I can walk into a gold dealer in New York or London or Frankfurt and the price label will be in the local currency. But what i am buying is a lump of metal.

It is different to buying an ownership share in a business, so it will perform differently to an equity market.

It is different to making a fixed-interest loan to a business or government, so it will perform differently to a bond market.

It is different to buying a property and letting it out to commercial or residential customers so it will perform differently to a real estate market

It is different to holding cash because 1000 pounds or dollars or euros or yen will probably buy fewer pints of beer, loaves of bread, or hours of someone's labour, in the future - due to inflation - while you *might* still be able to exchange an ounce of gold for 1000 loaves or 100 hours of admin work. So it will perform differently to cash.

All of these things are true no matter what currency they use to publish the price.

Gold is a commodity that can be easily shipped around the world and contracts transmitted electronically several time a second, eliminating arbitrage opportunities, so gold really only has one price, but the price can be stated in any number of currencies. Dollar is popular because it's "the international language of money" and you can say it costs $1300 per Troy Ounce and an African guy or Chinese guy or Russian guy will be able to relate, even though he is on the metric system. Tell a guy from Latin America the price in Polish Zloty per gram, and he will have to go off and do some Googling.

So, dollars are a good way of keeping score. But this doesn't mean that gold is correlated, or inversely correlated, with the US economy any more than it is to France or Germany. If you dig up a bar of gold in Cote d'Ivoire and ask it, it won't tell you that it has more affinity with the Americans than the Chinese or British.

4. So if gold is to perform it's function optimally, it needs to return USD changes in value.

Because of my answer to 3, this is patently false.

5. Holding a gold fund priced in GBP gives a random result (in that it is not fulfilling the same returns that the underlying portfolio theory was based on)

Isn't the whole point of a diversified portfolio, to get a random result which has an upward trend over the long long term but in the short term is uncorrelated with your maybe not-so-random results of other assets?

Perhaps you just need a better portfolio theory, or just understand the principles of your existing one, better.

Looking at is another way, if equities fall 40% and investors pile into gold as a safe haven and gold goes up 20% from $1,000 to $1,200, then the balanced portfolio has mitigated equity losses as is the theory. But if holding gold priced in GBP means that currency fluctuations have returned a loss of -10%, then holding gold hasn’t served its purpose. It may return a profit if currency moves favourably, but that’s just speculation, not investment principles.

OK, let's say all global stocks are going down in value by 40% in their local currencies for some reason.

You are describing a situation where sterling is strengthening fast, faster than gold, as gold valued at 20% more dollars is still worth 10% fewer pounds. In other words the $1200 is only worth what $900 used to be worth. A 25% reduction of value in the dollar versus sterling.

Well, imagine if you had put all your portfolio into US stocks. Not only would they lose 40% (an Apple share being worth $100 last week now only worth $60), but the dollars lost 25% in sterling terms due to dollar weakening by a quarter, so the $60 Apple shares are only worth the same amount of sterling as $45 used to be worth.

Effectively your Apple shares that were worth $100 "old dollars" last week are now worth the equivalent of 45 old dollars. A 55% loss.

So, your UK shares lost 40%in pounds. Your US shares lost 40% in dollars which is 55%in pounds. Your gold lost 10% in pounds.

Can you honestly tell me that you would have been better off holding no gold and simply experiencing the 55% loss on us shares and 40% loss on UK ones? Of course not. You have benefited from gold being a diversifier. How is it not fulfilling a useful purpose?

At this point you can sell your USD equities and GBP equities and gold, get a load of cash for it all, and then use all your pile of cash to go back into the three sectors in their original proportions. The net result is that you will have bought UK equities cheap, bought US equities super-cheap, and funded it all by selling gold at high prices (relative to the two equities classes). Just because gold isn't at an all time high price in GBP terms doesn't mean it is not priced highly relative to other options.

I am not saying portfolio theory always works, and assets always move according to theory. But hopefully the point and question I am asking is clear.

I think it was clear but inherently flawed due to your lack of understanding and inability to see the big picture...

Thanks for your thoughts.

OK

northbob

bowlhead99, thanks for the explanation.

Thinking about it having read your points, I can see that even though holding gold in non-hedged fund adds currency exposure, whatever the short term gains and losses GBP v USD, the long term benefit of an uncorrelated (to equities) holding remains.