RISK MANAGEMENT | 28 September 2023

ETFs: A Golden
Opportunity

Absa-CIB-Author

Michael Mgwaba

Head of Exchange-Traded
Products Absa CIB

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Exchange-traded funds (ETFs) offer an attractive route into the precious metals market for investors who are looking to diversify their portfolios

Global markets remain volatile – and more and more investors are being forced to diversify their portfolios in their hunt for yield. Many are increasing their exposure to alternative assets. “But while alternative investment has helped investors achieve good risk-adjusted returns and effective diversification in the past, some alternative structures can potentially introduce illiquidity risk in the portfolio,” warns Michael Mgwaba, Head of Exchange-Traded Products at Absa CIB.

This, he says, creates a strong investment case for precious metals, which provide exposure to alternative investments while also enhancing the liquidity of a portfolio.

Gold in particular has the potential to provide sustainable returns and effective diversification. “This strategy can resonate well with long-term investors like pension funds or sovereign wealth funds, given that metals are assets that can match their long-term liabilities,” he says.

Investors typically have two avenues to exposure to precious metals: either through owning mining stocks or via exchange-traded funds (ETFs). Of the two, ETFs have emerged as the vehicle of choice as they provide a direct exposure the spot price performance of the underlying metal. “However, there is a place for both avenues in a well-diversified investment portfolio. It is important for an investor who wants good investment outcomes in both the short and long term to strike a balance between owning mining stocks and owning actual metals,” says Mgwaba. “Both outcomes can be achieved by investing in ETFs and in mining stock ETFs.” Each investor would need to consider their investment goals to determine the appropriate asset allocation, he adds.

Outperforming the market

“While investing in traditional asset classes has historically provided good investment outcomes, today’s challenging market conditions require investors to be open-minded and pay attention to other assets – like precious metals,” says Mgwaba. He points to stubborn inflation and the devaluation of local currencies against the US dollar as a couple of the challenges that African markets are facing.

To test the theory, Mgwaba looked at Absa CIB’s NewGold Exchange Traded Fund, which is an ETF with the widest African market reach, to demonstrate the positive impact of gold on one’s portfolio. “NewGold is the first product in South Africa through which institutional and retail investors can securely invest directly in gold bullion, and it’s listed in South Africa, Botswana, Nigeria, Kenya, Mauritius, Namibia and Ghana,” he says. “We compared the NewGold ETF’s performance with that of

equity market indices and bond market indices, first over five years to cater for long-term investors, and then for year-to-date to cater for tactical investors. The outcomes were the same for all the markets we examined: gold outperformed all stock markets and fixed income markets.”

Those findings create a strong investment case for precious metals. “Our findings are that gold could also help investors to gain a cost-effective hedge, by buying gold ETFs priced in local currency while holding gold priced in US dollars,” he says. “This is not merely a theory; it’s backed by the actual performance we have seen over the past five years.” And while past performance is no guarantee of future returns, the results Mgwaba refers to certainly merit close attention.

“Many investors are comfortable with investing in traditional asset classes like fixed income and the stock market, which have historically provided them with good returns and diversification,” Mgwaba concludes. “However, under the current market conditions, they are no longer delivering the same returns as they were, with some even posting negative returns. This environment challenges investors to find viable alternatives – and our research seems to suggest that the returns and diversification investors are looking for can be found in gold.”

Absa-CIB-Author
Michael Mgwaba

Head of Exchange-Traded Products Absa CIB

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