Purchasing the best gold ETF in Canada can be a great way to diversify your assets. When other asset classes have experienced price declines or extreme volatility, gold outperforms. In 2020, gold achieved a record price of over $2,500 (CAD) as equity markets shook to their core. And now, in 2022, gold is getting close to record highs yet again.
Although investing in gold isn’t for everyone, the accessibility and low-cost structure of ETFs has made investing in gold more attractive than ever. In this article, we’ll discover the best gold ETFs in Canada. I’ll also share my thoughts on which fund represents Canadians’ best opportunity to diversify their portfolio with gold.
- Gold as a Valuable Asset
- Why Invest in Gold ETFs
- The Best Gold ETFs in Canada
- American Gold ETFs
- Gold Mining ETFs
- Currency Hedging With Gold ETFs
- Closing Thoughts on Canada’s Gold ETFs
- Thanks for Reading!
Gold as a Valuable Asset
People have invested in gold, in one way or another, for thousands of years. There are a few reasons why gold is an especially attractive investment:
- Gold is the most non-reactive of all metals. This means that it won’t corrode, rust, or easily tarnish. This makes it a sustainable store of value – you can lock your gold in a vault and it’ll remain unchanged for thousands of years.
- Gold is a very attractive precious metal, making it sought after for use in jewelry all over the world. India alone consumes over 600 tonnes of gold per year, largely used in fine wedding jewelry.
- In recent decades, gold has become an integral commodity used in the manufacturing of electronics. As a highly efficient conductor, over 300 tonnes of gold is used every year to make cell phones, laptops, and various other electronic and electrical devices.
Why Invest in Gold ETFs
The thesis for investing in gold today revolves around it being a “fear trade”. It’s an asset that holds its value or appreciates during periods of fear. For example, during stock market collapse, recession, high inflation, and yes, during pandemic. Gold is especially attractive to investors who are hedging against those “worst case”, unlikely scenarios where hyperinflation or societal strife causes the value of our currency to collapse.
Putting those extreme scenarios aside for now, there’s a lot of evidence has that gold is a worthy investment for anyone looking for an asset that is uncorrelated or often inversely correlated with the stock market.
Not being correlated with the stock market is perhaps the most attractive quality of gold as an investment. Most assets available to invest in today are at least somewhat correlated with stock market performance. Whether it’s real estate, corporate bonds, or preferred shares, most asset classes will move together with the stock market to some degree. That means if you’re primarily invested in stocks and corporate bonds, a market crash will affect you quite dramatically.
If your portfolio includes gold, or other minimally correlated assets like U.S. treasuries, at least some of your portfolio will weather the storm or even outperform during a stock market rout.
The Best Gold ETFs in Canada
Gold ETFs are an attractive way to invest in gold without bearing all of the costs associated with purchasing, transporting, and safely storing the gold bullion yourself. The best Gold ETF in Canada is structured as a trust. Under this structure, the fund invests and stores physical gold bullion and issues shares to investors in the fund. This means that each share of the fund is worth a specific amount of gold. In some funds, the amount of gold each share represents fluctuates, and in others it’s more constant, only being reduced periodically by the fund’s fees. Some of the best gold ETFs allow their investors to redeem their shares for a specific amount of actual gold. This can be an attractive feature for investors who are worried about whether or not their investment is actually backed by physical gold bullion.
In the following list I’ll share my research on the best gold ETF in Canada. These include offerings from some well-known asset managers like Blackrock, and a few lesser-known funds which are also attractive options for anyone looking to add gold bullion to their portfolio.
Royal Canadian Mint Canadian Gold Reserves (MNT)
In my view, the best gold ETF in Canada is a unique offering from the Royal Canadian Mint. Established back in 1908, the Royal Canadian Mint is a Federal Crown Corporation with a long history of operating gold refineries and providing bullion coins for the domestic and international market.
The Royal Canadian Mint expanded into the ETF (well, “ETR”) space in 2011 to provide investors the means to purchase a beneficial interest in gold bullion held in custody by the Royal Canadian Mint. These ETRs, or Exchange-Traded Receipts, are listed on the TSX and are RRSP eligible just like the other funds in this list. Here are some of the stats on their ticker, the aptly named MNT.
|Canadian Gold Reserves||MNT||603||2011||0.35%|
As of today, each share of MNT is worth 0.329 grams of gold. The amount of gold each share is worth will decrease by their 0.35% MER each year. A unique feature of MNT is that if you have enough shares, 10,0000 ETRs to be precise, you can redeem them for actual gold bullion. The fund gives you the option of redeeming your shares for one troy ounce Maple Leaf coins, 32.15 troy ounce Kilobars, or London Good Delivery bars which range from 350 to 430 troy ounces of gold.
With a MER of only 0.35%, investing with the Royal Canadian Mint seems to be a very attractive proposition. You get to add a little bit of Canadian history to your portfolio, and best of all, if you save up enough shares, you can redeem them for actual gold bullion. At the minimum redemption of 10,000 shares, you’d receive over 100 one-ounce Maple Leaf coins. Family heirloom, anyone?
Purpose Gold Bullion Fund (KILO)
I believe that the second best gold ETF in Canada is a lesser-known offering from Purpose. Purpose is a relatively young asset manager, having only been founded in 2017. Normally I wouldn’t consider an asset manager that new, but their gold fund has an attractive MER of only 0.26%. And like some of the other funds I’ve listed, their shares are redeemable for gold bullion. Also, their gold is safetly stored with the Royal Canadian Mint – my choice for the best gold etf in Canada. Here are the stats for their ticker, KILO.
|Purpose Gold Bullion Fund||KILO||198||2018||0.26%|
Even though their gold fund has only been around for a few years, it has already amassed a respectable 198 million dollars Canadian. Purpose also provides access to their gold in an unhedged version with ticker KILO-B. Overall, thanks to some of their lower than average management expense ratios, Purpose has attracted over $9 billion in capital across their various funds as of this year.
Sprott Physical Gold Trust (PHYS)
The third best gold ETF in Canada is the Sprott Physical Gold Trust. Sprott is a unique asset manager that primarily focuses on precious metals like gold, silver, platinum, and palladium. Their CAD hedged gold-focused fund, PHYS, is the largest gold bullion ETF in Canada with over 4 billion Canadian dollars in assets, and over 2 million ounces of gold bullion held by the trust. Here are the stats on their ticker, PHYS.
|Sprott Physical Gold Trust||PHYS||4,100||2010||0.45%|
Like the last fund I discussed, MNT, Sprott’s fund is also redeemable for gold bullion once the investor has accumulated a large enough number of shares. The Sprott Physical Gold Trust’s assets are also held in custody by the Royal Canadian Mint – like many of the other best gold ETFs in Canada.
iShares Gold Bullion ETF (CGL)
Most Canadian investors are familiar with Blackrock and their family of exchange traded funds marketed as iShares. Most iShares funds track stock or bond markets, but they have a few funds that track unique assets like preferred shares, mortgage-backed securities, and yes, gold. iShares has two gold ETFs marketed to Canadians: the CAD hedged CGL, and unhedged CGL-C. These funds round out my choice for the fourth best gold ETF in Canada. Here are some of the key statistics on their two gold funds, CGL and CGL-C.
|iShares Gold Bullion ETF||CGL||902||2009||0.55%|
|iShares Gold Bullion ETF (Unhedged)||CGL-C||348||2011||0.56%|
The iShares Gold Bullion ETFs seek to replicate the performance of physical gold bullion. The funds achieve this by investing in 100 or 400 troy ounce bars of gold. Their investments in physical gold have allowed these funds to return over 17% so far this year.
The iShares Gold Bullion ETF is an excellent choice for investors who have come to know and love iShares. As one of the world’s biggest asset managers, Blackrock has proven to be singularly focused on keeping management expense ratios as low as possible. Investors like me who hold various other iShares products will find CGL’s management expense ratio of 0.55% to be a bit higher than we’re used to. But you have to keep in mind that purchasing and storing a physical asset like gold is more expensive than purchasing shares of individual companies. As such, the 0.55% expense ratio is justified by having an ETF that’s backed by actual, physical gold bullion.
Horizons Gold ETF (HUG)
Horizons is an excellent Canadian asset manager. And while I don’t consider this fund to be one of the best in Canada, it’s worthy of being included on this list. If you’re someone like me who manages their own investments, there’s a good chance you’ve come across some of Horizons’ funds. They have a huge assortment of active and passive funds. This includes funds implementing covered call, factor-based, and leveraged strategies. Lucky for us, their gold ETF is a little more vanilla than some of their other offerings. Here are the key stats on the Horizons Gold ETF, HUG.
|Horizons Gold ETF||HUG||35||2009||0.78%|
Yes, their ticker is “HUG” which I find quite adorable. What I don’t find adorable is their higher than average MER of 0.78%. While the Horizons Gold ETF does hold gold outright, its high expense ratio has kept investors searching for greener pastures. That explains why the Horizons Gold ETF has a paltry 35 million dollars Canadian under management.
American Gold ETFs
Another option for holding gold in your portfolio involves some cross-border shopping. There are a few very popular gold ETFs available in the U.S. These include the iShares Gold Trust with ticker IAU and SPDR Gold Shares with ticker GLD. Each of these ETFs have billions of assets and have very attractive MERs of 0.25% and 0.40% respectively. The only roadblock is getting together enough USD to make a purchase. There are a few ways to achieve this, including using a strategy called Norbert’s Gambit which I’ll discuss more in future articles. However, I think the offerings available in Canada are attractive enough to avoid the trouble of converting to USD to invest in these U.S. funds.
Gold Mining ETFs
A popular method of achieving exposure to gold in your portfolio is to invest in gold mining companies or ETFs focused on gold mining. This includes ETFs like the iShares S&P/TSX Global Gold Index ETF (ticker XGD), which has over $1.7 billion invested and a MER of 0.61%. The fund holds 40 individual gold companies including names like Newmont, Barrick Gold Corp, and Kinross Gold Corp. The fund is primarily invested in Canadian gold producers but has a sizable 21% allocated to the U.S.
Gold Mining ETFs vs Gold ETFs
Although funds investing in gold miners tend to be exposed to other market forces, like the cost of fuel, they do represent a fairly efficient method for gaining exposure to gold in your portfolio. To give you some evidence for this, here’s the recent performance of XGD compared with iShare’s Gold Bullion ETF, CGL.
As you can see, the iShares Gold Index ETF is much more volatile than the iShares Gold Bullion ETF. That’s because physical gold is less volatile than the miners that produce it. Despite this difference in volatility, you can see that the two ETFs are highly correlated – their prices tend to move in the same direction. The ETFs were positively correlated over the entire 6 month period shown above. Their correlation coefficient reached as high of 1.0 on multiple trading days.
Currency Hedging With Gold ETFs
One reason gold is so popular is because it can be used as a currency hedge. However, somewhat confusingly, a few of the ETFs in this list are CAD-hedged. This means that the fund managers seek to reduce the impact of a rising Canadian dollar on the value of the fund. There’s some cost to achieving this, which produces a slight drag on the investments when compared to unhedged funds. Also, this hedging might be counterproductive in another way. When you invest in a fund that hedges against the Canadian dollar, what you’re really doing is investing in two different assets:
- A fund whose shares represent a specific amount of gold.
- An instrument that compensates you if the Canadian dollar rises, and punishes you if the Canadian dollar falls.
Currency Hedging Example
Let’s see how hedged gold ETFs perform when the Canadian dollar rises and falls, all without the value of gold (with respect to other currencies) changing:
|Hedged||Initial Share Price||Canadian Dollar||Final Share Price||Investment Return|
As you can see, the share price of unhedged funds oscillate with the value of the Canadian dollar. When the Canadian dollar falls, the price of that share (representing some fixed amount of gold) increases in Canadian dollar terms. That’s because the underlying amount of gold that a share of the fund represents is unchanging. You still own the same amount of gold regardless of how the CAD performs. For the hedged ETFs, the impact of the changing Canadian dollar is canceled out, resulting in no negative or positive effect on your investment. As you can see in the above table, in an environment where the CAD falls, you’re actually losing out on some sizable performance gains when compared to the non-hedged fund.
The purpose of investing in gold as a Canadian is not only to benefit when the value of gold appreciates, it’s also to protect against a falling Canadian dollar. For that reason, I don’t see much of a benefit to investing in a gold ETF that’s hedged.
Closing Thoughts on Canada’s Gold ETFs
My view is that the best gold ETFs in Canada are the funds that are as simple as possible. As I’ve discussed, I’m not interested in hedging my investment against changes in the Canadian dollar. In fact, a primary reason one would purchase gold is to protect themselves from inflation eating away at the value of the Canadian dollar. You can’t do this if you’re hedged. With this in mind, my opinion is that the best gold bullion ETF for Canadians is the Royal Canadian Mint Canadian Gold Reserves fund with ticker MNT. It is unhedged, so it aligns with my objectives for purchasing gold. It is also backed by real gold bullion, so I know its share price will closely follow the actual price of gold. Finally, it’s MER of 0.35% extremely attractive, only losing out to the much younger and far less established Purpose Gold Bullion Fund.
The Best Gold ETF in Canada
Gold is an attractive asset for any investor looking to diversify their portfolio and accumulate assets that are less correlated to the returns of the stock market. Thanks to the power of ETFs, there are quite a few excellent choices for Canadians to invest in gold , all without having to purchase and safely store the asset themselves. If you’re looking to invest in gold, I recommend checking out a few of the funds I’ve listed here, and especially the Royal Canadian Mint Canadian Gold Reserves fund, MNT.
Thanks for Reading!
Thank you so much for reading! If you’re interested in reading more, please check out some of my other recent articles. Some popular choices include my primer on withholding taxes for Canadians and my review of the best Canadian dividend ETFs!
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