PMGOLD: Risk Warning

We place a 'high risk' warning on any ETF/fund that we consider to be, as it says, higher risk. This is a label only, it is not a prediction by us about the expected performance of the ETF/fund.

Best ETFs Australia applies this label so that investors are aware that this ETF provides unique exposure to an asset class which can result in higher-than-average volatility.

The best example of the types of ETFs and funds that catch this warning label include:

• Hedge fund style investments. For example, those which use derivatives or shorting in the hope of making excess returns.
• Leveraged ETFs. For example, 'geared' funds and ETFs which use synthetic leverage (e.g. derivatives or options).
• Other trading-style ETFs/funds. This is a catch-all for ETFs and funds which aggressively trade their portfolio positions for extra returns. Such a strategy can result in higher fees, taxes for investors and sub-par returns.

Tired of the same ol' dividend stocks?

Commodities sector

The Best ETFs Australia commodities sector includes ETFs which invest in:

• Gold - physically-backed or synthetic
• Platinum - physically-backed or synthetic
• Silver - physically-backed or synthetic
• Other precious metals
• Oil & energy

Synthetic vs. Physically-backed

Typically, "Synthetic ETFs" are commodity ETFs which provide investors with exposure to an asset class (e.g. gold prices) but they do not own the underlying asset (gold bars). They do this with derivative contracts.

"Physically-backed" ETFs have arrangements in place (including storage, safe storage and insurance) to physically own the underlying asset (e.g. gold bars). You will find information on where and who holds the gold, as well as some key risks associated with the arrangement, in the ETF's product disclosure statement (PDS).

What's better?

It depends on the ETF, asset class and arrangements in place. Typically, physically-backed ETFs are considered safer because they have a claim on the underlying assets.

What exactly does Commodities invest in?

There are many different ways to invest in gold, the most difficult of which would be to actually buy physical gold from a mint and keep it under your bed – or probably in a safe – for a rainy day. Unfortunately, holding costs and logistics can make this strategy difficult, and ETFs can make getting the exposure to gold easier. Unlike many other gold ETFs, PMGOLD can be physically redeemed for any of The Perth Mint’s bullion coins and bars.

Sector risks

When you invest in commodities (like gold, silver or oil), some academic studies show you may be lowering some of the risks in a diversified portfolio. For example, you won’t have all of your eggs in your ‘Australia basket’.

However, our emphasis is on the some. Investors considering investing a meaningful amount of money in commodities should strongly consider getting expert financial advice before making an investment decision.

Factually speaking, some of these risks to commodities include:

• Market/price risk - we believe predicting the price of gold, oil and other commodities with certainty is impossible. If you choose to invest in a commodity ETF you must accept that the value of your investment could be significantly influenced by factors outside of your control, including political, regulatory and financial risks; and gold production and demand risks, to name a few. Often, the price of some commodities will move higher with global uncertainty. However, there are no guarantees this will happen in the future.
• Sovereign/regulatory risks – governments and regulators throughout the world can change their policies on inflation, trade, investing, taxes and even the rights of people and investors. Australia has a very stable and robust financial, legal, political and societal system — many countries don’t.
• Supply of commodities - supply and demand for gold, silver, platinum and oil can work for you or against you. Prices are often influenced by investor demand, competing uses for the commodity (e.g. jewellery, LNG) and macroeconomic factors (e.g. inflation, US interest rates). Supply can be impacted by miners' exploration and production success and large financial institutions (e.g. investment banks and central banks).
• Liquidity risk – if we experience a shortage of commodities and spike in demand there's a chance the price of a commodity could jump but the price of the ETF (inside your share brokerage account) could rise even higher. This would create a situation in which you, the investor, could overpay for the actual commodity which will be bought by the ETF issuer.
• Synthetic exposure - many commodity ETFs will NOT physically own or store a commodity (e.g. oil) on behalf of its investors. Instead, they'll use derivative contracts to get you exposure to the commodity. This can create significant risks such as counterparty risk (see below) and delivery risk. Make sure you read the PDS of the ETF you're considering before you invest. The PDS will tell you where the commodity is -- or isn't -- stored. The PDS should be available on the ETF issuer's website.
• Counterparty risk  & holding structure – some ETF issuers use complicated holding structures to get you exposure to the underlying investment overseas. In Australia, ASX-listed shares and ETFs use the same system to ‘settle’ transactions and ‘hold’ your ETFs in your name, it’s called the CHESS system. However, if the ETF invests in overseas assets and commodities, it’s likely those assets will be held using another system or holding structure governed by other rules. Rest assured there are some safeguards in place. However, you should always do your research, read the ETF’s PDS or consult a licensed financial adviser. Is your commodity ETF insured against loss or theft?
• FX/currency risks – A big reason many investors put their money overseas is to get exposure to another country’s currency. For example, if you invest 1 AUD into US Dollars at a currency exchange rate of 1.00, you will get 1 USD in return. If the USD gets stronger (meaning the Aussie dollar exchange rate falls), your 1 USD is now worth more! However, it can go in the opposite direction. For example, if the AUD-USD goes to 1.10, your 1 USD (bought at a lower exchange rate) is now worth less in AUD terms than before. This risk is the reason why some ETFs are currency ‘hedged’ — to avoid the impact of currency fluctuations.

Our expert analyst just named 3 stocks to buy right now

What you need to know about Perth Mint

The Perth Mint is exactly what it says on the tin -- a store and exchange of gold bullion (aka bars) and related products. As of 2019, the Perth-based Mint distributed some $18 billion of gold, silver and platinum to customers in over 100 countries.

The Perth Mint offers just one ASX ETF which trades with the ticker symbol PMGOLD. The owner of Perth Mint, Gold Corporation, is relatively unique because the physical gold held by the PMGOLD ETF is backed by the West Australian government under Section 22 of the Gold Corporation Act 1987.

Potential allocation for PMGOLD

This ETF might be used as part of a 'tactical' or 'satellite' allocation in a diversified long-term portfolio because of its unique strategy, costs, risk-reward profile and the expectation of long-term returns.

What is The Core-Satellite Approach?

A core-satellite approach puts investments into two 'buckets' depending on the expected risk and returns.

Bucket 1: Core Investments

The 'core' is the larger part of an investment portfolio and could be reserved for more conservative investments. For example, this might include diversified, low-cost and easy to understand funds, bonds, shares or ETFs.

If you're new to investing, the core is a good place to start.

Core ETFs might include:

• Australian shares (index strategies)
• Australian bonds and global bonds
• Cash

Bucket 2: Satellite/Tactical Investments

The 'satellite' or tactical bucket is the smaller part of a portfolio (e.g. 0% to 30% of your entire portfolio). In this section, investors might decide to take more risk, invest in unique or unproven strategies, buy fast-growing individual shares, etc.

Tactical strategies could be higher risk, higher cost and more complicated strategies that are used in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).

Tactical ETFs might include:

• Australian shares (rules-based strategies)
• Global shares (rules-based strategies)
• Commodity ETFs
• Currency ETFs
• Cash ETFs
• Hedge funds

Typically, what is PMGOLD used for?

The PMGOLD ETF is designed to make life easy, allowing investors to gain exposure to physical gold via an ETF which can be bought and sold like shares. The PMGOLD ETF gives investors direct exposure to the underlying asset (gold bars) and returns depend on the international spot price of gold in Australian dollars, less fees and costs.

How do I invest in the Gold ETF ETF?

The easiest way to buy an ETF is through your online share brokerage account. Just search for the ticker code and buy it. The following podcast explains how to buy shares and ETFs for the first time.

Meaning, you can follow the exact same process for ETFs as you do for shares -- both can be purchased in one account.

Australian Investing 101

Don't have a brokerage account for ETFs?

Read our tutorial on understanding how share brokerage accounts work.

Is PMGOLD a good ETF?

We believe that knowing whether or not to invest in an ETF requires a lot of research, even for an ETF like this one. ETFs are long-term investments, so it's important to do the right amount of research into the ETF before you invest, and consider how it fits with your risk profile, strategy and the other investments in your portfolio.

Where you can go to find more research on this ETF:

Reports like this one on the Best ETFs Australia website were built to help you understand ETFs and to provide free access to news and research across all Australian ETFs, index funds and selected managed funds.

This report is the free version of our ETF reserach and it contains general information and should not be considered as a recommendation or personal financial advice. If you want to receive personal financial advice and have someone tailor the ETF research to you, you should speak to a financial adviser.

If you don't want to pay a financial adviser, here's what you can do:

• Before doing anything, you should always read the ETF's Product Disclosure Statement (PDS), which should be available on the ETF provider/issuer's website. The PDS explains some of the risks, the fees and other important information.

If you're looking for more free content from us...

• Take our free ETF investing course, it's great for beginners. Just click here to enrol and begin learning.
• Subscribe to our mailing list, create a free account and access our latest investment reports.

To get our analyst's expert ETF research you can join Rask ETFs. Rask ETFs offers our members access to simple model portfolios, expert research on our top 10 Australian ETFs, easy-to-follow ETF strategies and lots more. It's just $199 to access Rask ETFs. Click here to learn more

Special note for financial advisers:

If you're a financial adviser and you want to receive our analyst research to help you build model portfolios, please register for Rask Platinum Adviser (beta). We're making it free for the first 200 financial advisers.

Free investment report

Disclaimer: Any information contained in this report is limited to general financial advice/information only. The information should not be relied upon because it has not taken into account your specific needs, goals or objectives. Please, consult with a licenced and trusted financial adviser before acting on the information. Past performance is no guarantee of future performance. Nothing in this article should be considered a guarantee. Investing is risky and can result in capital loss. By reading this website, you acknowledge this warning, having read our Financial Services Guide (FSG) and agree to our terms & conditions available here. This article is authorised by Owen Raszkiewicz of The Rask Group Pty Ltd.