Putting Gold To Work  

For over a millennia gold has been a store of value and a source of savings in tough times. Civilizations all over the world dating back thousands of years stored it and sometimes even kept all of their wealth in gold. That’s certainly the case in some of the biggest countries of the world today including China, India and Turkey to name a few.
A frequent practice in India is gold loans, whereby a loan is backed by an individual’s jewellery holdings, or physical gold assets, to get them through hard times. Such is the unfortunate case right now with the current state of the pandemic in India. Gold serves this purpose because it has proven to be a valuable commodity for thousands of year, and lenders can trust it as adequate collateral. 
Now there’s a new kid in town with laser eyes. Aiming to be an alternative currency and store of wealth, Bitcoin has made a splash in the last several years. Using a new concept called the block chain, Bitcoin aims to be a decentralized currency with only a limited number of coins in circulation. Bitcoin is ingenious and has been incredibly successful: going from around a price of approximately $4 USD (yes $4 USD!) 10 years ago to over $60,000 USD in early April and seeing increased attention throughout the world. There are many cryptocurrencies around today, many developed with various uses in mind, and some, like Dogecoin, with no uses at all in mind (it was started as a joke). But Bitcoin, throughout its short history, has focused on its status as wealth storage, even shunning factions of the crypto world that wanted to turn it into more of a transactional currency. So, is Bitcoin a modern and shiny new digital gold? 
Not so fast.
As the hackers of the Colonial Pipeline have recently discovered – sometimes holding on to your Bitcoin is not a given. If you bury gold bars in your backyard, only you know where they are, but Bitcoin’s public decentralized ledger, part of the appeal, means there may be ways to track who owns what, when.
But that is a story for another time: what we’ll discuss further is comparing gold and Bitcoin as a financial asset.
When you compare gold and Bitcoin’s performance over the past five years - and Bitcoin proponents will keep reminding everyone of this fact –  Bitcoin substantially outperforms gold. It’s not even close.


Source: Bloomberg, as at June 30, 2021

Bitcoin Return vs. Gold Return


Source: Bloomberg, as at June 30, 2021

But now look at the volatility over the past five years:

Source: Bloomberg, as at June 30, 2021

The above chart suggests that bitcoin is, on average, five times more volatile than gold. And Bitcoin’s volatility of volatility is extremely high as well. So, is bitcoin just a volatile digital gold? If that’s the case, it’s not as useful as a safe store for wealth.

There are other ways we can interpret this, so let’s look at the drawdowns of gold, bitcoin, and bonds:

Source: Bloomberg, as at June 30, 2021

In the past five years we’ve seen average drawdown of 15-20 percent on gold. While bonds, as represented by the US Aggregate Float Adjusted Bond Index, saw drawdowns between 6 percent and 7 percent in the past five years. Bitcoin, on the other hand, saw major drawdown of 80 percent and 70 percent in the past five years. What if you needed your money at the end of 2018? It would be worth a lot less than what it was at the high. Bitcoin appears to act a lot more like a stock than a store of wealth – you would need to have a longer-time horizon to get through the volatility. In that sense, it feels like Bitcoin is much riskier.

Bitcoin Price in USD


 Speaking of stores of wealth, what about bonds?
In most of the western world, savers have historically used bonds, not gold, as a store of wealth. This has worked well in the past 40 years demonstrating low volatility and small drawdowns.
Bonds have the added advantage that they pay an interest rate coupon which savers have relied on for retirement years.
Here’s the problem: the U.S. federal funds rate has been close to zero for the better part of the last 10 years, which is why investors have been turning to gold and Bitcoin. The fear is that the government will no longer pay them a yield despite an increasing cost of living, and therefore, will not protect the value of their money. As the consumer purchase index (CPI) rises and rates stay at zero, they may be right. Unfortunately, as governments deal with higher and higher debt loads, they may not have a choice.
So can we somehow combine a low-volatility asset that protects value and still earns a yield?
We’ve established that Bitcoin is likely too volatile for risk-averse savers – and from a volatility and drawdown perspective, could be viewed as even riskier than stocks. Gold is a good store of value with lower volatility than stocks, but offers no yield. 
This is where a covered-call strategy may be able to help – both by reducing volatility and earning a yield in the process. As a reminder, a covered-call strategy involves the investor selling a call option on an underlying asset and receiving a premium for this call. The call option gives the buyer the right, but not the obligation, to buy an asset for a set price, called the strike price. Investors may have seen covered call strategies on stocks, but they can in fact be used for any asset class that has tradeable options. Gold can be particularly appealing for such a strategy since it doesn’t have a yield of its own.

By writing 33 percent of at-the-money call options on a portfolio of gold ETFs, HGY – the Horizons Gold Yield ETF –  aims to do just that. It earns an annualized yield, currently 4.64%, as at June 30, 2021 while maintaining two-thirds of the portfolio unwritten to capture any upside in the price of gold.
A covered call strategy may not make sense to an investor who believes that gold is going up quickly, since the strategy does give up some upside, but for investors looking for a yield and the safety of gold, HGY may be an option rather than any “digital gold”.

HGY Performance


Source: Bloomberg, as at June 30, 2020.
*HGY Inception Date: December 17, 2010.
The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.

Learn more about HGY: https://www.horizonsetfs.com/ETF/HGY

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.