Effective portfolio diversification with Gold ETF & index funds

Gold has proven to be a valuable asset and hedge against inflation as well as geopolitical and economic uncertainty for centuries. Investing via indexed solutions provides a standard and cost-effective way to benefit from this interesting diversification opportunity.

The popularity of the yellow metal is based on the capacity for production of jewelry and coins as well as broad industrial usage. In addition, due to its unique value, anchored in its rarity, Gold has always been recognized as a global currency. This is why the International Monetary Fund (IMF) and many central banks around the globe hold Gold in their reserves.

Since early 2024, gold has soared to new highs, which took many market observers by surprise. The price of the precious metal rose sharply, even as the outlook for the global economy improved and inflation, although still elevated, receded from its recent highs. This move has been attributed, at least partially, to increased gold buying from central banks around the world, including China.

Nevertheless, even at these elevated price levels, we believe the case for gold as an attractive diversifier remains strong. In addition to continued central bank demand, geopolitical tensions, persistently high inflation, and likely lower US interest rates are all supportive for gold prices. Gold is an attractive real asset because adding it to investors' portfolios that are primarily invested in equities and bonds, brings in more diversification and can help to mitigate downside risks.

Gold is seen as a safe-haven asset, particularly in times of financial market uncertainty and periods of economic stress. The yellow metal may be considered as valuable insurance against the persistent risks of greater market volatility.

While gold is one of the oldest investments in the world, the methods of investing have evolved significantly. Traditionally, investors bought physical gold in the form of bars, coins or jewelry, which is still a popular way of investing. However, this involves ownership costs for keeping it in a safe place – for instance a bank safe deposit box – and insurance against damage or theft.

Alternatively, investors can invest indirectly by buying shares in companies that mine, refine or market gold or through the purchase of physically backed Exchange Traded Products (ETPs) such as Exchange Traded Funds (ETFs) or index funds. Gold ETFs and index funds are fully backed by actual gold deposits and can be traded on a daily basis with high liquidity. They offer high security, and from a legal perspective, the fund structure ringfences the Gold from the issuing financial institution for the benefit of the shareholders.

Safety-oriented investors will prefer ETFs and index funds exclusively invested in physical Gold following the London Bullion Market Association’s (LBMA) specific requirements in terms of minimum quality standards. Moreover, investors should consider that the Gold is lodged with reputable custodian banks in Switzerland. Our Gold ETFs offer investors the right to redeem the Gold in-kind in all trading units between 1 gram and 12.5 kilograms and the gold is kept in a high security vault in Switzerland.

For investors who are conscious about the carbon footprint of gold production, we also offer an ETF based on carbon neutral LBMA gold bars. These are gold bars whose footprint has been measured and verified, a reduction plan validated, and the remaining emissions offset through the purchase of high-quality offsets¹.

Investors seeking to generate income and with expectations of moderately downward-, upward- or sideways-trending gold markets may be interested in a Gold income maximizer strategy. UBS offers an innovative index fund that is following a call-option overwriting strategy, with the aim of generating recurring yield for investors on top of a physically backed strategy that tracks the price of gold. While investors may not participate fully in strong upward movements in gold prices, they benefit from the stability of recurring income, which improves the risk-return profile of a simple gold investment.

Currency movements can significantly impact the total returns of investments across asset classes. For investors wishing to reduce this volatility, currency hedged Gold ETFs and index funds provide a solution by allowing them to hedge the currency of their investment returns into that of their target base currency Swiss Franc and Euro.

This UBS ETFs and index funds invests in gold and may therefore be subject to considerable fluctuations in value. Every fund has specific risks, which can significantly increase under unusual market conditions. The main risk of gold is that there is a lack of risk diversification due to the concentration of the investment in gold.

Historical performance indications and financial market scenarios are not reliable indicators of future performance. This does not constitute a guarantee by UBS Asset Management.

ETFs and index funds invest in gold and may therefore be subject to considerable fluctuations in value. Every fund has specific risks, which can significantly increase under unusual market conditions. The main risk of gold is that there is a lack of risk diversification due to the concentration of the investment in gold.

^1. MKS PAMP Working Paper, January 2023