IAU iShares Gold Trust

Gold saw the worst year in more than a decade in 2013 falling a massive 28%.  The popular gold ETF SPDR Gold Trust (GLD) designed to deliver the return of the spot gold price plunged 27% while Market Vectors Gold Miners ETF (GDX) shed 52% last year. The latter put up with more pain as it often trades as leveraged plays on this yellow metal.

Not only these two ultra-popular Gold-related funds, but nearly every other gold product lost in the range of 27–28% this year. These include a variety of funds and there are several popular choices.

Beyond GLD, these include the iShares COMEX Gold Trust (IAU) which tracks the spot price of gold, Physical Swiss Gold Shares (SGOL) that holds physical gold bullion bars of secure vaults in Zurich, Switzerland, Physical Asian Gold Shares (AGOL) – an option to play on gold outside Western countries by holding bars in secure vaults in Singapore.

Investors also have a futures based option, thanks to the PowerShares DB Gold Fund (DGL). This product tracks the performance of the DBIQ Optimum Yield Gold Index Excess Return plus the interest income from U.S. Treasury bills.

Among this pack of underperformers, only one product RBS Gold Trendpilot ETN (TBAR) stood out as a winner being largely unruffled by the gold slump in 2013 and losing only 4.8%. Let’s dig a little deeper and find what‘s behind TBAR’s perseverance amid the gold collapse (read: Are The Trendpilot ETNs Better Than Broad Market ETFs?).

Why is TBAR Breezing Past its Gold Cousins?

The key to TBAR’s success was that this unusual debt instrument looks to track the price of gold up to a certain limit. Unlike physically backed Gold ETFs, this fund provides exposure to the Gold Trendpilot Index.
The index is exposed either to the price of the gold bullion or the cash rate, subject to the relative performance of gold price on a simple historical moving average basis.

The gold price at or above the historical 200-Index business day simple moving average for five successive business days is considered as a positive trend and the ETN tracks the spot price of gold.

Alternatively, a gold price below such an average calls for a negative trend, which was basically the case in 2013. In such cases, the index tracks the cash rate, which is the yield, derived from a hypothetical notional investment in 3-month U.S. Treasury bills.

This means TBAR did not reflect the return of the price of gold bullion in most of 2013, rather it tracked treasury bonds. The product will mirror the performance of gold only when the positive trend is confirmed. This dual exposure strategy helped TBAR outperform all other products relying solely on the spot price of gold (read: A Comprehensive Guide to Gold Mining ETFs).

Is there Any Downside Risk?

Dodging a dreadful gold slump in 2013 comes at the cost of a relatively high expense ratio. In fact, the product is pretty unique in terms of expenses. The ETN charges investors 100 bps in fees while tracking the price of gold bullion which makes it a high cost choice in the precious metal space and costs 50 bps per annum when the product tracks T-Bills instead.

Its volume is also very light as it trades at an average daily volume of about 13,000 shares, thus costing investors more in terms of a higher bid-ask spread ratio (also see Can Gold Mining ETFs Dazzle in 2014?).

Secondly, as TBAR considers the trend in the performance of gold, it often misses out on a sudden spike in gold prices. So, the product must not be considered by investors with a short-term gold investing horizon.

Also, sometimes the five-day level may be too short a time period for some trends to develop.
Moreover, being a debt instrument of Royal Bank of Scotland, TBAR does carry some credit risks. Probably, for the above-said reasons, the product hasn’t been able to attract much investor interest so far.

Debuting in February 2011, the product has garnered about $27.7 million of assets while the space bellwether GLD sits on a pile of $31.3 billion assets. Notably, GLD charges 40 bps for its exposure.

Final Take

TBAR is not a pure-play on gold and offers hedging opportunity if gold crashes. In our opinion, it is a better suited gold product when the underlying metal falters, or if you have a sluggish outlook. As such, there are plenty of cost effective and less risky products in the market to capture the winning momentum of gold. 

As of now, the year 2014 does not seem to be favorable for the yellow metal. With $10 billion of modest tapering already decided on and some measured taper announcement scheduled for this year, the price of the greenback should go higher.

Equity markets are also soaring on improved economic data causing another round of threat in the safe haven status of the yellow metal (read: Pain or Gain Ahead for Gold Mining ETFs?).

However, some experts are still hopeful on gold and expect global demand for the metal to shoot up as investors abandon paper currencies. If  gold ETFs try to turn around at any point of time this year, they can only recoup some of the gigantic losses incurred throughout 2013.

In short, brighter times for gold are not likely to appear before late 2014 or 2015 which makes TBAR an interesting option for a precious metal play, and especially for those who like the metal, but are looking for a technical approach to gold ETF investing that may offer lower risks in this rocky time.

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MKT VEC-GOLD MI (GDX): ETF Research Reports
 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
RBS-GLD TRNDP (TBAR): ETF Research Reports
 
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