Investors normally rush to gold and other precious metals during uncertain times, and, for my part, I opted for a basket of precious metals available through the ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA:GLTR). This ETF has outperformed the S&P 500 (SPX) in 2022.
However, as seen by some of the spectacular comebacks effected by the S&P 500, namely on February 25 when the index gained 2.24%, this does not look like the end of the bull market. In these conditions, it is important to look for new investment vehicles and amend the way we invest, in order to become aligned with new market realities.
This is what I do using GLTR and the Invesco Real Assets ESG ETF (IVRA) pair.
Investing in precious metals
As for GLTR, its underlying fund includes gold, silver, palladium, and platinum in its portfolio, with the individual weight in oz (ounces) shown in the listing below. As of February 26, silver carried the highest weight in ounces with gold coming in second place. Also, GLTR does not utilize any hedging mechanism, and its underlying fund is backed by actual physical gold located in vaults in London and Zurich.
In addition to diversification reasons, I chose GLTR as metals like platinum, palladium, and silver have wider usage as industrial metals when compared to gold. Thus, while they serve as a store of value during turbulent times, their individual spot prices can also benefit from increased industrial-related demand. This has indeed been the case with GLTR producing a better one-year performance than the SPDR Gold Trust ETF (GLD).
However, as shown by the dividend frequency row above, GLTR pays no dividend, and this is one of the reasons I chose IVRA in order to be used in a common portfolio. The ultimate aim is to obtain better returns, while benefiting from portfolio protection during turbulent times.
The appeal of real assets
First, IVRA is an investment vehicle that provides exposure to the geopolitically safe North American region where democratically elected governments ensure the rule of law and where many people are environment-conscious.
Second, with its relatively brief 14-month existence since it was incepted in December 2020, IVRA’s underlying fund has delivered better performance than the S&P 500 as per the pale blue chart below, and this, both on a one-year and year-to-date basis. Now, the broader market has been highly volatile since the start of 2022 with macroeconomic issues like high inflation either deterring investors to buy stocks or forcing them to seek the safety of commodities.
The Invesco ETF’s ESG mandate is evidenced by 80% of its portfolio consisting of publicly-listed shares of “real assets” stocks that meet ESG (Environmental, Social, and Governance) standards.
According to the fund managers at Invesco, real assets are companies that are either principally “engaged in real estate, infrastructure, natural resources or timber industries, or support such businesses”. Looking at individual names, these come from the Real Estate, Energy, Material, and Utilities sectors as shown in the table below. At this point, it is important to mention only 25 out of the total 55 holdings are mentioned in the table below.
In order to explain IVRA’s better performance with respect to the broader market, I take the help of the latest edition (2022) of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions.
One of the megabank’s reasons to justify an investment in real assets is that, compared to credit or even other equity investments, these offer both income growth strength as well as better resistance to inflation. The bank also makes the case for real assets being more immune to liquidity risks grappling financial markets. For investors, liquidity risks occur when vast amounts of capital stay on the sidelines instead of being employed to generate returns from the stock market due to factors like economic uncertainty or fear.
Now, there is a difference between actually owning real assets through direct purchase or private equity and purchasing the shares of a publicly listed company operating under one of the sectors forming part of the broader “real asset” category. In this respect, one of the problems with stocks is that, during moments of market turbulence or when earnings are not aligned with analysts’ expectations, they can be highly volatile, in turn adversely impacting the holding ETF. This was the case on February 23-24 because of American Tower (AMT), which weighs 4% in IVRA’s holdings suffering from falling margins as well as an escalation in the Eastern European conflict. As a result, the Invesco ETF lost nearly 7%.
Better insulation against volatility
However, when considering a 5-day period spanning from February 18 to 25, IVRA delivered a 1.8% gain, at the same time outperforming the S&P 500 by more than two times. The Invesco ETF also outperformed the Vanguard Total Bond ETF (BND) and GLTR too.
This signifies that negating periods of acute market volatility, real asset stocks are better compared to the broader market or even bonds. This also applies to instances where there is a high probability of severe supply-side disruptions with the latest example being international tensions between Ukraine and Russia.
IVRA’s ESG focus also becomes handy for those who want to fight climate change while being invested, but it is different from traditional funds like the iShares U.S. Infrastructure ETF (IFRA) which I covered a few days back and which fully discloses details as to its holdings on a daily basis. This is not the case for the Invesco ETF which instead publishes a “Tracking Basket” on its website each day. This basket only provides an idea of the fund’s holdings but not the actual portfolio, both in terms of holdings or percentage held.
Now, those adamant on transparency and used to regularly tracking what their investments precisely consist of may simply not select this ETF. Some may even view this “non-disclosure” as an additional source of uncertainty in addition to the usual portfolio and market volatility risks. Now, the reason Invesco invokes for not providing regular data pertaining to the exact details of its holdings is that traders can copy their fund manager’s investment strategy. According to them, in case a trader manages to copy or, worst, predict the fund’s stock buying or selling patterns, it will be detrimental to IVRA’s performance.
Demonstrating portfolio protection
My point of view is that as long as IVRA provides insulation against adverse market conditions, there is no problem with Invesco’s approach. Additionally, this is an actively managed fund for which the managers charge fees of 0.59% which is about the same as GLTR’s 0.6%. However, IVRA’s relatively higher fees are more than compensated by dividends of 2% paid on a monthly basis, compared to zero for GLTR.
Consequently, extending the portfolio protection rhetoric normally achieved by owning precious metals to include diversification in real assets through IVRA makes sense in this highly volatile stock market. I would also like to bring to investors’ attention that, at this juncture, there seems to be no end in sight for an eventual ending of the eastern European conflict.
Coming to the asset correlation factor, IVRA and GLTR are inversely correlated to each other. For this matter, investors will notice that IVRA’s (orange chart above) share price moved in the opposite direction to GLTR’s (in green) during the peak volatility period. Hence, IVRA’s real assets can find a place together with precious metals in a diversified portfolio.
In the sample portfolio below, I constructed using price performance data from Seeking Alpha and considering an investment of $1000 each in IVRA and GLTR, the overall returns are above $2000 for all time periods except the 9-month one.
Adding the 2% dividend yield of IVRA to portfolio returns, the benefits are even higher, but there is more in way of resilient growth.
Concluding with resilient growth
Aligned with the need for risk insulation, there is also the resiliency factor brought by the 53% of real estate assets in IVRA’s portfolio. For example, many landlords just pass on additional inflation-related expenses to tenants, thereby ensuring that they are able to sustain returns from their real estate assets.
Furthermore, the 20.7% and 13.3% of exposure to the Materials and Energy sectors respectively are likely to produce growth.
First, for materials, analysts at Bank of America (BAC) are bullish on ETFs in the materials sector and one of the reasons could be that with the $1 trillion infrastructure bill having been voted by the Senate in November 2021, demand for metals, timber, and concrete should go up. Second, sustained oil demand in 2022 and a potentially prolonged conflict between Russia and Ukraine are two factors that are favorable for energy stocks to continue with their upside.
Therefore, the ingredients for IVRA to produce further upside are here. Also, with the European conflict starting to take a wider dimension with the involvement of the west, GLTR’s share price is on its way up.
Finally, owning shares of GLTR enables investors to benefit from portfolio protection during volatile market conditions as is the case currently. At the same time, gaining exposure to real assets in North America using an ESG approach through IVRA can be synonymous with resilient growth.