Gold ETCs versus gold futures: the fee difference widens to a record

Nov 25th, 2020 | By | Category: Commodities

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By Jim Goldie, EMEA Head of Capital Markets, ETFs and Indexed Strategies at Invesco.

Jim Goldie, EMEA Head of Capital Markets, ETFs and Indexed Strategies at Invesco.

Jim Goldie, EMEA Head of Capital Markets, ETFs and Indexed Strategies at Invesco.

Futures have long been used by investors as a means to gain exposure to certain asset classes, including commodities such as gold. However, as recent analysis by Invesco has shown, ETCs represent a compelling alternative to gold futures, with a profound difference in pricing.

For instance, the February ’21 gold future, which will soon be the next active contract, has been trading at ~$10 per ounce premium (51bps) vs spot gold, according to Bloomberg, as of 16 November 2020.

While not as expensive as previous rolls this year, this still equates to a substantial cost to investors as the expiring contract (December ‘20) is trading very close to spot prices. Looking back at previous rolls this year, it suggests that investors accessing gold exposure via futures in 2020 may have endured aggregated roll costs of 600bps or more.

This compares to an annual cost of holding the Invesco Physical Gold ETC (SGLD) of just 15bps.

Looking specifically at the December ‘20 contract, which is currently the active contract that is nearing expiry, analysis shows that clients rolling August ’20 to December ’20 contracts may have paid a premium of ~$27.50/oz (146bps) vs spot gold.

The December contract has recently been trading at <$2/oz premium vs spot and, as a result, the client has worn the full cost of trading the previous roll at a large premium, which is consistent with what we have witnessed at Invesco for the majority of rolls this year.

Gold ETCs such as Invesco’s have seen large inflows in 2020 due to the market uncertainty. The Invesco Physical Gold ETC has itself seen inflows of $5 billion in 2020 to the end of October, with AUM at $14.1 billion.

While this demand has cooled in recent weeks, the asset class is expected to remain in focus given the far-from-certain economic environment.

If investors are concerned about the cost of futures and the price difference with ETCs, switching gold futures to, say, Invesco’s SGLD can be done at any point in time.

The cost to switch from gold futures to Gold ETCs is currently very cost-effective from the expiring December ’20 contract, which is trading in line with spot gold. Given the dislocation in gold futures markets this year, SGLD may present a more cost-effective alternative to obtaining gold exposure for investors.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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