IGLD: Just Own Gold Outright Instead (BATS:IGLD)

Gold has no income. Obviously. But just because a shiny object doesn’t inherently have yield, doesn’t mean you can’t create a strategy that does which still plays off how the precious metal performs. That’s the premise of the FT Cboe Vest Gold Strategy Target Income ETF (BATS:IGLD). At a basic level, IGLD is designed to provide exposure to the price return of the exchange-traded fund SPDR Gold Shares ETF (GLD) – arguably the most liquid and low-cost method for investing in gold bullion. But IGLD has an additional goal – to generate a consistent level of income that exceeds yields on short-term invest­ment-grade US Treasury securities, in addition to providing potential participation in gold returns.

How is that even possible? To meet both this explicit and implicit mandate, IGLD actually operates according to a very complicated plan: investing almost all of its assets in a ‘basket’ of short-term US Treasury securities, cash and cash equivalents, but also in a wholly owned subsidiary that in turn holds exchange-traded options (including so-called Flexible Exchange Options, or FLEX Options) that reference performance of GLD.

Dissecting IGLD’s Holdings: A Closer Look

Note when we look at IGLD, it doesn’t actually own GLD but rather derivatives on it.

The idea here is that the fund is buying Treasury Bills and synthetically replicating the performance of Gold with long call and short put options on GLD. So you’re getting the tracking of performance without actually owning Gold in the portfolio.

Certainly interesting, certainly complex, and certainly unique. These metrics above illustrate the use of options by IGLD to give it exposure to GLD and its price via a call.

Peer Comparison: Navigating the Gold ETF Landscape

Although IGLD is unique among gold investments, it is helpful to look at its performance and features relative to actual ETFs that track Gold itself as opposed to synthetically recreating its performance. Since this is using GLD, when we compare IGLD to GLD, the price ratio decline suggests it underperforms pretty meaningfully. It turns out owning Gold is better than IGLD.

Pros and Cons: Weighing the Opportunities and Risks

On the positive side, the fund’s income-generating strategy for gold exposure may be attractive to those who want to earn a continuous return while retaining exposure to gold. Furthermore, active management and using options that may be sensitive to market conditions will also likely allow the fund to react flexibly to changing market conditions, compared with passively managed gold ETFs.

But these significant risks must be recognized for what they are. The creation of income by these strategies involves an element of complexity, particularly through the use of options and other derivatives, which can entail counterparty risk, leverage, and liquidity issues. Finally, a fund that is geared towards income generation must concede that it may not participate optimally in the gold rally should one occur, as every gain in price is immediately realized through what you sell in the form of call options for extra income. This explains why the fund has underperformed meaningfully.

Conclusion: A Gimmick That Has An Audience

I have mixed feelings on this one. It’s unique, but I think it makes more sense to own Gold outright. If you’re an income person and don’t care about actually owning Gold itself but just want access to it as a return stream, then this is an excellent choice for precious metal investing. IGLD from this perspective offers growth potential and income generation. And the only way to do that is through options.

This, of course, does introduce a level of complexity and risk that would have to be carefully weighed, but IGLD’s ability to produce income above short-term Treasury yields, along with its potential for gold price appreciation, makes it an interesting precious metals play for a diversified portfolio. It’s not one for me, though. I am bullish on Gold directly, and the best pure-play way to do that, income or not, is through the commodity pure and simple. The momentum in Gold is real, the breakout is real, and I don’t think you need to focus on income here. Just enjoy the long overdue ride directly.

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