Inside BMO's new gold bullion ETFs

Portfolio manager explains why BMO GAM recently launched these gold bullion products, what's driving gold prices now, and the role these could play in portfolios

Inside BMO's new gold bullion ETFs

BMO Global Asset Management (GAM), recently launched three ETFs with direct exposure to gold bullion. The BMO Gold Bullion ETF (CAD Units), BMO Gold Bullion ETF (USD Units), and BMO Gold Bullion Hedged to CAD ETF (CAD Units) have been trading on the TSX since March 10th. They were launched at a near-historic high for gold prices and reflect a macro environment where individual investors, institutions, and governments are driving demand for gold.

Alfred Lee, portfolio manager and investment strategist at BMO GAM, explains that gold bullion is offering what many of these actors are seeking now: a source of uncorrelated return. He explained how BMO GAM developed these ETFs, the physical stores of gold required to underpin them, and the forces driving demand for gold at this time.

“For the last few years, especially in the wake of 2022, we’ve been finding a lot of investors are looking for this alternative exposure, something that is not related to traditional stocks or bonds. A lot of investors are looking for that separate sleeve or asset class that can offer a different component to a portfolio right now,” Lee says.

Gold is particularly attractive because of the historic highs it has hit recently. Lee attributes that rise in price to a few main demand drivers. Central banks, he says, have played a key role in the past few years as they bought up gold for their reserves. Inflation has eroded the value of currency reserves, and gold has been seen as a useful diversifier for central banks. Many countries are moving towards a ‘de-dollarization’ of their currency reserves, replacing USD with other currencies or gold. There is some talk of the BRICS nations exploring alternative currencies outside of USD or the Euro. It is quite possible that if they launch a unified currency, it would be backed by gold.

Retail investors and asset managers have also flocked to gold as a hedge against uncertainty. Given the levels of volatility we have seen across asset classes in recent years, gold has offered many a safe haven. Geopolitical tensions, too, have ratcheted up demand for gold. As we continue to struggle with high inflation and unprecedented volatility in ‘safe’ asset classes like bonds, gold offers attractive traits that many investors are seeking right now.

“It adds diversification, and a lot of investors are using gold as a tactical exposure to hedge against those risk factors,” Lee says. “But we find a lot of investors are also using gold as a strategic position. Historical data shows that a 5 per cent total allocation to gold from both the equity and bond sides of a 60/40 portfolio is going to improve return numbers across all time periods and reduce risk as well.”

Launching these products at near a historic peak in the price of gold, Lee stresses the strategic value of the asset long-term. He notes that gold has outperformed equities over the past 20-25 years. He can’t say whether we’re at the peak of the gold market, or if it could go higher from here, but he stresses the diversification, non-correlated returns, and potential long-term benefit in a gold exposure.

It was the non-correlated aspect of gold that prompted BMO GAM to launch these bullion ETFs. Lee explains that they already offer gold equity ETFs, which are more correlated to broader equities, especially during market sell offs. Bullion does not face the same correlation risk.

The new ETFs are backed by a physical store of gold that BMO now holds in a professionally maintained vault in downtown Toronto. Lee says that the vault, which is operated by BMO Capital Markets, has a highly experienced vaulting team managing it. The gold is also insured and the vault security is held to the highest professional standard. Lee notes that through these ETFs, investors may get exposure to physical assets that are better secured than an individual might be able to achieve.

The costs of that vaulting are integrated in the management fees for these ETFs, all of which are 20 basis points. That also includes managing the ease of access and relative liquidity of a gold bullion ETF, as opposed to holding physical gold.

As advisors discuss the prospects for gold with their clients, Lee stresses the importance of a focus on the strategic and long-term implications of gold exposure inside portfolios.

“It’s really the diversification properties. I think investors should be less concerned about whether gold is at a high right now. If you look at the long-term numbers, your portfolio is going to be more efficient by adding gold,” Lee says. “From an advisor’s point of view, a more efficient portfolio with lower risk should be beneficial to the end client.”