The holy grail of investing is no longer about investing in the next Facebook or Google—it’s finding a safe haven where you can collect monthly income.
Gold has historically been that safe haven, but seriously lacking on the income front.
Bitcoin was promised to be gold 2.0 as a market hedge. But the price of Bitcoin has fallen by over 50% in the last year. The S&P 500 is down 8%. Gold? Up 3%.
But we’ve still lacked the income kicker. Companies are cutting dividends for stockholders and the performance of historically high income-paying assets, like real estate investment trusts (REITs) has been downright abysmal—down 25% in 2022.
Yield-starved investors are left in limbo with still record high inflation and historically low interest rates.
Gold alone can only do so much. Meaning, simply investing in gold ETFs alone is no longer cutting it. Investors looking to get exposure to gold have to look beyond ETFs that simply track the price of gold.
Get gold income hedged against inflation
Gold is known for its inflation-resistant properties. Meaning, it does well when prices are rising. It’s not known for generating income. That’s recently changed, however.
Enter the Strategy Shares Gold-Hedged Bond ETF (GLDB). It’s not a gold ETF, per se, but it provides all the benefits of owning gold. But it has a key advantage over every other gold ETF on the market—it offers income.
The GLDB pays a monthly dividend that yields 2.5%. A dividend yield on a gold ETF is unheard of, much less getting paid monthly. Compare that to the S&P 500’s 1.6% dividend yield.
If you really dig you can find gold-miner ETFs that offer dividend yields of less than 2%. But then you’re exposed to the risk of the stock market. GLDB is a less risky investment, not beholden to the stock market.
The secret? The GLDB is a portfolio of investment-grade corporate bonds that are fully inflation-hedged.
Can gold be more than an inflation hedge?
Most investors know to buy gold when the price of consumer goods is rising. For example, during periods when inflation is over 5%, the average annual return on US equities is a negative 2% and a negative 4% for US Treasuries, while gold returns 11%.
However, gold has proven its resilience in times of volatility. Notably, during market downturns. For every major decline in the S&P 500 of 15%, gold has outperformed the index. During the subprime mortgage meltdown, the S&P 500 fell 18% and gold rose 32%.
Why there’s no substitute for gold
Just like Bitcoin hasn’t managed to overthrow gold during its 15 years of existence, no other commodity carries the same benefits as gold when it comes to investing.
Gold has handily outperformed commodities as a whole over the last 20 years—returning an average 8.6%, versus the negative 0.3% annualized return for commodities. In fact, over those 20 years, gold’s return beat both global equities and US bonds.
It’s done all this with low volatility, as measured by beta. A beta of 1.0 means the assets move together. The closer the beta is to 0, the less the assets move together. Gold’s beta relative to all major global equity and fixed income indexes is less than 0.25 for the last 30 years.
Bonds aren’t dead
Despite all the benefits that gold can provide, bonds aren’t dead. They still have a place and a purpose. GLDB uses them for generating solid, safe returns.
Investing in stocks, gold miners included, comes with the possibility of dividend cuts and price volatility. Corporate bond interest paid to investors is fixed. It can’t be cut.
But why corporate bonds and not government ones?
The thing you get from corporate bonds is higher yields than investing in government bonds. You don’t get the backing of the US government, like with Treasuries, or the guarantee of a city in the case of municipal bonds, but most investment grade corporate bonds come with a lot of safety.
Cities can go bankrtupt—Detroit did in 2013—but on the corporate side, it’s hard to see a company like Disney or Verizon going belly-up.
And why not simply invest inflation-linked bonds, such as Treasury Inflation Protected Securities (TIPS) ETFs
There are several TIPS ETFs out there that invest in these government securities that are indexed to inflation. They pay high dividend yields when inflation is really high, but on a total return basis, most handily underperform other bonds. The iShares TIPS Bond ETF (TIPS) has returned an average 3.3% annually over the last three years.
And unlike with GLDB, owning TIPS ETFs means you miss out on the upside of gold prices—and the myriad benefits that come with having it in your portfolio.
Avoiding bond ETFs
Even though bonds still have a purpose in investor portfolios, they do come with one major shortfall—loss of purchasing power. The purchasing power of bonds erodes as inflation rises. There’s been a nightmare for investors needing safe sources of income. Until now.
The GLDB helps solve that issue—the corporate bonds it owns are paired with a gold hedge. And on the flipside, they’ve solved the paradox of being able to get a monthly income while enjoying the benefits of owning gold.
Can you DIY your own gold-hedged bond portfolio?
The short answer is: Yes.
The correct answer is: You probably shouldn’t.
To do such a thing would take constant monitoring of your gold and bond positions to ensure the right amount of hedging is maintained.
Here’s an easy example: Just look at the price of one of the biggest corporate bond ETFs, the SPDR Portfolio Corporate Bond ETF (SPBO), and one of the biggest gold ETFs, the SPDR Gold Shares (GLD). Over the last three months, SPBO is up almost 10% and GLD is up 16%. An 80/20 position in SPBO/GLD would have returned roughly 11%.
Solid returns, but the GLDB is up 25%. You capitalize on the upside of both bonds and gold, and that’s where having a more dynamic strategy pays off.