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Gold ETF a safe haven for portfolio diversification: SGX's Howie

The Edge Singapore
The Edge Singapore • 4 min read
Gold ETF a safe haven for portfolio diversification: SGX's Howie
Trading in the exchange traded fund (ETF) is just one of the several popular ways investors can protect their equities portfolio.
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SINGAPORE (June 5): When global stock markets suffered the selldown earlier this year, not all asset classes endured the same fate. From the start of the year till May 21, the Straits Times Index (STI) dropped from 3,222 points to 2,557 points, or by around 20%. On the other hand, the SPDR Gold Shares ETF, which is traded on the Singapore Exchange (SGX), went from US$143.45 to US$163.13 per unit, a gain of around 14%.

Gold outpacing the STI is not a recent occurrence. Last year, STI gained 9% but the SPDR Gold Shares ETF was up 17%. Gold remains the safe haven, be it during a virus outbreak or trade war.

From the perspective of Geoff Howie, SGX’s market strategist, trading in the exchange traded fund (ETF) is just one of the several popular ways investors can protect their equities portfolio. It checks a few important boxes: easy to trade, accessible even for retail investors, and last but not least, it is a hedge against volatility of the equity markets.

In a clear sign of its popularity, average daily turnover of the SPDR Gold Shares ETF year-to-date has tripled to around US$6 million ($8.4 million), from US$2 million in 2019. “If you have participated in the gold ETF market over the past five months, then you are in good company,” says Howie. In the third week of March, when the markets suffered the worst of the indiscriminatory selling, turnover of this product soared to as high as US$11 million a day.

In a sign of its global appeal, the SPDR Gold Shares ETF is traded not just on SGX but also four other exchanges. It has delivered steady returns too. Since its inception in November 2004, the ETF has generated an annualised return of 9% in US dollar terms. In Singdollar terms, annualised returns to May 2020 were at 8%. It was listed in October 2006 on the SGX.

More than just capital appreciation, the ETF is also a way for investors to diversify their portfolios and reduce risks. Over the past decade or so, the STI has had merely a 5% correlation with gold prices, versus a 70% correlation with crude oil prices. “What this gold ETF can offer is efficient exposure to the price of gold. It does have a long history of being used across the globe, and is useful for diversification and portfolio management,” says Howie.

Another way for investors to protect their portfolio is to buy so-called defensive stocks. Typically, they come from a few broad sectors: healthcare, consumer staple, utilities and telecommunications. “These are sectors that have a traditional history of being less sensitive to economic cycles,” he says.

Howie lists some examples of such stocks: supermarket chain Sheng Siong Group; chicken, pork and milk producer Japfa; and palm oil giant Wilmar International. Year to May 26, they have gained 27% and 14%, and fallen 5%, respectively, versus 20% loss for the STI. In their most recent first-quarter results, while most companies reported lower earnings, these three reported earnings growth of between 23% and 50%.

The third investment product flagged by Howie is that of index futures. There is an important distinction between this and gold ETF: index futures are so-called SIPs (specified investment products), and therefore limited only to sophisticated investors, and are not for retail players.

Investors qualified to trade index futures are known to be able to hedge their positions amid market volatility. Better still, they trade using margins. SGX has been doing a roaring business in the trading of its range of index futures, especially the SGX FTSE China A50 Index Futures.

The webinar took place just three days after MSCI and SGX said they are going to let the bulk of their licensing agreements expire next February. In response to a question from the participants, Howie says that SGX has built up a very strong multi-asset portfolio of products, and it has reached a critical mass that attracts investors and market participants from all over.

With the licence expiry, SGX has guided for a 10% to 15% drop in annualised earnings. But the exchange is certainly not sitting still. On June 2, it launched 10 single stocks futures, giving investors another way to make bets on blue chips such as DBS, Genting, Keppel, OCBC, Singtel, Thai Beverage, UOB and Wilmar. “We’ve a very good track record of bringing in new derivatives, which puts us in a position to grow and refresh. We have a strong pipeline,” says Howie.

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