[james4beach]

I've been looking into bullion as a complement to bonds in my portfolio (will play more of a defensive role in my portfolio, hence why I'm not picking gold producer companies). I've been reading up on Canadian gold bullion ETFs and wanted to ask about the pros/cons of CGL, MNT and KILO:

I see a lot of chatter about MNT - is there a reason you guys prefer this to, say KILO, which seems to have a lower MER (0.26% to 0.35%)?

I was not aware of KILO. The bars are held at the Royal Canadian Mint (so this is in fact the same storage as MNT gold). The problem I see though is that KILO is currency hedged. You will really want a non-hedged gold fund, because that's the only thing that can protect you from a CAD collapse scenario.

KILO might have a non hedged version KILO.B but I can't seem to pull up a ticker for it, so I don't know what to make of it. This might be a promising fund though. They are a relatively new asset manager. I'd be interested in hearing others thoughts on KILO if they know anything about it.

There are no distributions from bullion funds since there are no dividends or interest.

You definitely want un hedged. Imagine the scenario where gold priced in USD is flat (not really rising or falling) but the CAD implodes and loses half of its value. A hedged bullion fund will return 0%. An unhedged bullion fund would return 100% and this is the effect you want.

I see my gold holding as insurance against the domestic currency (CAD) imploding. For the same reason, you should use foreign stock ETFs that are unhedged, such as ZSP or XAW.

 

[Franko]

I was not aware of KILO. The bars are held at the Royal Canadian Mint (so this is in fact the same storage as MNT gold). The problem I see though is that KILO is currency hedged. You will really want a non-hedged gold fund, because that's the only thing that can protect you from a CAD collapse scenario.

KILO might have a non hedged version KILO.B but I can't seem to pull up a ticker for it, so I don't know what to make of it. This might be a promising fund though. They are a relatively new asset manager. I'd be interested in hearing others thoughts on KILO if they know anything about it.

There are no distributions from bullion funds since there are no dividends or interest.

You definitely want un hedged. Imagine the scenario where gold priced in USD is flat (not really rising or falling) but the CAD implodes and loses half of its value. A hedged bullion fund will return 0%. An unhedged bullion fund would return 100% and this is the effect you want.

I see my gold holding as insurance against the domestic currency (CAD) imploding. For the same reason, you should use foreign stock ETFs that are unhedged, such as ZSP or XAW.

Thanks for the insights. I was able to find the KILO.B ticker on my brokerage site, so can confirm that this non-hedged version does exist.

I don't hedge any of my international ETF holdings because I like the currency diversification, but was unsure of the benefit with gold in particular, as all of the gold ETFs seem to have both a non-hedged and hedged version, so I thought maybe things are different in gold-land. Thanks for confirming that non-hedged remains the better pick!

In regards to CGL vs. MNT, it seems MNT is favoured because of the option to allow investors to cash in their shares for the actual bullion (CGL doesn't seem to allow this) - is this why MNT was trading at a premium, as mentioned in earlier posts? Beyond this though, does MNT offer any benefit over KILO that I'm not aware of? (KILO offers redemption of shares into bullion as well).

 

[james4beach]

I don't hedge any of my international ETF holdings because I like the currency diversification, but was unsure of the benefit with gold in particular, as all of the gold ETFs seem to have both a non-hedged and hedged version, so I thought maybe things are different in gold-land. Thanks for confirming that non-hedged remains the better pick!

Well this is just how I understand it but I hope everyone else weighs in on this one too... I hope I'm not missing anything. Any thoughts from others around here?

In regards to CGL vs. MNT, it seems MNT is favoured because of the option to allow investors to cash in their shares for the actual bullion (CGL doesn't seem to allow this) - is this why MNT was trading at a premium, as mentioned in earlier posts? Beyond this though, does MNT offer any benefit over KILO that I'm not aware of? (KILO offers redemption of shares into bullion as well).

For a long time, CGL.C (unhedged) was a very small fund and MNT was much larger. MNT has been around $500 million in assets for many years and CGL.C was tiny in comparison, so initially, I didn't take CGL.C very seriously. As a rule of thumb I go with funds that have larger asset bases.

Today CGL.C has grown to $349 million and also shows pretty good daily volume and liquidity. I also watched CGL.C very closely through the COVID-19 crash and it behaved very well... it continued perfectly tracking gold even during market turmoil, and trading with very tight bid/ask spreads, so that really earned my respect.

Currently I hold more CGL.C than MNT, actually. I should mention that I also hold IAU which trades in USD.

One thing I continue to like about MNT is that it's a more "direct" ownership of bullion. Each share is explicitly a claim on some ounces of gold, under a Crown corporation. There is basically no middleman and I really like that. You're directly trusting the Royal Canadian Mint and the Government of Canada.

KILO involves more middle men. You've got the asset manager, maybe an intermediate custodian, and the Royal Canadian Mint. That's not necessarily a bad thing but there are more entities in the chain of trust. You asked if MNT has any benefit, and I would say yes: it cuts out the middle men.

 

[Franko]

One thing I continue to like about MNT is that it's a more "direct" ownership of bullion. Each share is explicitly a claim on some ounces of gold, under a Crown corporation. There is basically no middleman and I really like that. You're directly trusting the Royal Canadian Mint and the Government of Canada.

KILO involves more middle men. You've got the asset manager, maybe an intermediate custodian, and the Royal Canadian Mint. That's not necessarily a bad thing but there are more entities in the chain of trust. You asked if MNT has any benefit, and I would say yes: it cuts out the middle men.

That's good to know - I wasn't aware that MNT was a Crown corporation. Indeed, if the difference in fee between KILO and MNT is 10 basis points or less, I'd be inclined to choose the Crown corporation for the added security.

 

[james4beach]

That's good to know - I wasn't aware that MNT was a Crown corporation. Indeed, if the difference in fee between KILO and MNT is 10 basis points or less, I'd be inclined to choose the Crown corporation for the added security.

Yup, MNT is backed by the Crown corp. There is the risk of something happening to the Mint's vaults, like for example, an attack, natural disaster, or theft. Then again, when another fund like KILO.B or CGL.C hold gold through some bullion vault, they take on similar risks as well so I don't think there is anyway around those fundamental dangers.

Note however that the units can trade at a discount to fair value (NAV) just as they can trade at a premium. Realistically, this is the biggest danger I can see ... the share price will not necessarily track the price of gold. The units legally represent gold bullion, but that does not mean their price on the market will track gold perfectly.

Excerpts from the MNT prospectus:

Subject to the terms of the ETRs, each ETR will constitute a direct unconditional obligation of the Mint, an agent of Her Majesty in right of Canada and as such will constitute a direct unconditional obligation of Her Majesty in right of Canada.​

. . .​

As the direct legal and beneficial owners of the gold bullion held by the Mint, ETR Holders bear the risk of loss, damage or destruction of the gold bullion owned by ETR Holders as the result of an Excluded Event. In all other circumstances, if there is a loss, damage or destruction of the gold bullion held by the Mint, ETR Holders must rely on the Mint's ability to satisfy any claims against it (the Mint's obligations under the ETRs are backed by the full faith and credit of the Government of Canada).​

​

 

[hfp75]

Right now according to my math, MNT is at a -.48 discount... to actual Gold Value....

J4B what did you say with CEF you got for discount to NAV ? -1% max ?

 

[james4beach]

Right now according to my math, MNT is at a -.48 discount... to actual Gold Value....

J4B what did you say with CEF you got for discount to NAV ? -1% max ?

In the past, CEF at times had huge discounts to NAV. As much as -10% discount, also as much as +12% premium. It's possible MNT could do something like that as well.

In most of its years of trading, MNT had a slight discount to NAV. Based on my samples over time, between 2016-2019, here's what I measured:
Average -0.64% discount to NAV
Worst I saw was -1.5% discount to NAV

 

[james4beach]

Also it may be good to discuss things specific to MNT in another thread about gold ETFs, perhaps

MNT: Royal Can. Mint Gold ETR

The MNT premium has dropped down to 4.7% at the moment, almost back to normal.

www.canadianmoneyforum.com

or

Investing in Gold

I was able to closely monitor the price premium of MNT last week and bought some at 1.46% premium. It has bounced back almost 10% till now. So happy:giggle: I was watching the premium slide down to normal but missed the rebuy. It was 2.5% and then I got caught working for a few days and ect...

www.canadianmoneyforum.com

 

[james4beach]

Here's a chart of the last 2 years of the Permanent Portfolio, using my CAD-based version with this allocation. Other variations of the PP, and All Weather as well, will have a very similar shape.

This looks like a reasonable entry point to buy. I plan to buy quite a bit in 2 weeks and hoping the market doesn't rally before then. Asset allocation requires me to buy whichever asset is below its target weight, automatically getting me to "buy low".

Currently, bonds and gold are both somewhat weak and that's reflected in this chart. Gold is down 13% from its summer high and bonds have been pretty flat.

 

[james4beach]

This looks like a reasonable entry point to buy. I plan to buy quite a bit in 2 weeks and hoping the market doesn't rally before then.

Putting my money where my mouth is, I'm in the process of buying more of this allocation. Loaded up on bonds & gold today, more stocks tomorrow.

Will be about 60K of new purchases when all's said and done. I still think it's a pretty good entry point, especially on bonds & gold.

 

[james4beach]

Here's where I now stand after buying more stocks, bonds, and gold ... annual rebalancing (through new buys).

This puts me back at my targets: 20% gold, 30% stocks, 50% bonds

 

[MrBlackhill]

I'm wondering, as the goal of that strategy is to diversify as much as possible, why don't you use All World ETFs (XWD or XAW) for the equity part? Your equity part is only exposed to US and Canada. And I recall how you've told about the Japan market collapse. From that point of view, it could also happen to the US. Dalio is pretty bearish about the US and pretty bullish about the EM, especially China. An All World ETF has only about 60%-65% US exposure. Your equity part may be only 50% US but that's because you have 50% Canadian exposure from home-country bias.

 

[MrBlackhill]

I recall that you've simplified the bonds allocation by buying XBB instead of splitting into long-term and short-term bonds. Why not simplicity the XIU+ZSP with just one ETF like XWD or XAW. 100% XWD had the same performance as 50% XIU + 50% ZSP, while being more diversified.

 

[james4beach]

I recall that you've simplified the bonds allocation by buying XBB instead of splitting into long-term and short-term bonds. Why not simplicity the XIU+ZSP with just one ETF like XWD or XAW. 100% XWD had the same performance as 50% XIU + 50% ZSP, while being more diversified.

Yes that's a valid point. Although this is a passive allocation, I am trying a slightly technical approach for my "foreign" component. The half in Canada (XIU) is forever but I plan to vary the other half (currently ZSP) according to foreign market strength. I think I posted the trend-chasing idea somewhere but it's basically the same as Portfolio Visualizer's simple momentum model based on a trailing 1 or 2 period test. I will switch between the CAD equivalents for SPY/EFA/EEM based on which is strongest. Since about 2013, the strongest has been SPY (ZSP) so I'm sticking with that for now.

For the foreseeable future, this means XIU + ZSP as the S&P 500 remains very strong today, with no other foreign market coming close. But at some point when leadership switches to other foreign markets, I do plan to adapt and hop over to that ETF. This is a technical approach, but should be quite passive as I expect these changes to be very rare. In my back tests of this idea I found very good results and the ability to keep up with regime changes (US, emerging, etc) with minimal trades.

If that idea turns out to be problematic, then I'm open to just using XAW. That's obviously simpler, but as you know, I like to sprinkle a bit of active stuff into my mostly passive strategies

I'm wondering, as the goal of that strategy is to diversify as much as possible

I also think that the primary diversification is across asset classes, so in the big picture, I think I gain the most diversification value (efficient frontier etc) through the asset class mix. The details of the stock mix still matter but I think it's a lesser concern overall. For example when stocks crash, they all crash. When global stocks have a good year, they all typically have a good year.

In any case I'm going to keep a mix of Canada + foreign. It may not make a big difference whether that's XIU+ZSP or XIU+XAW ... which is why I'm willing to make a bit of a gamble on the technical approach mentioned above, since it only applies to 15% weight

 

[MrBlackhill]

Although this is a passive allocation, I am trying a slightly technical approach for my "foreign" component.

I was wondering because my interpretation of the goal of such a strategy is to be very passive. To me, that includes not to having to think of which geographic is performing the best.

I also think that the primary diversification is across asset classes

It's also a portfolio meant to be no-brainer and to reduce drawdowns. I agree though that it's achieving it from diversification through asset classes. But you decided to diversify & simplify the bond part, but not the equity part. The big Canadian exposure adds volatility and bigger drawdowns. The US exposure has to be watched as other countries may rise or if US may collapse. Imagine a Japanese investing in such a portfolio with 15% exposure to his home country and then seeing 15% of his portfolio disappear when their market collapsed.

If that idea turns out to be problematic, then I'm open to just using XAW. That's obviously simpler, but as you know, I like to sprinkle a bit of active stuff into my mostly passive strategies

All that being staid, I don't think any of that is going to happen in the next decade and with a portfolio as safe as that one, you can certainly afford to play with some parameters as you wish and add a bit of yours.

 

[OneSeat]

Why is the S&P500 so popular? It's brand image is obviously one of the reasons - but anything else?
I've nothing against it, has been my mainstay in the US for years, but I just changed accounts and went with ITOT (total US market) instead - mainly because it has been outperforming the SP in recent years.

- - - the S&P 500 remains very strong today - - -

 

[MrBlackhill]

Why is the S&P500 so popular? It's brand image is obviously one of the reasons - but anything else?
I've nothing against it, has been my mainstay in the US for years, but I just changed accounts and went with ITOT (total US market) instead - mainly because it has been outperforming the SP in recent years.

If you chose ITOT over SPY, then you should also look at VTI, which is slightly outperforming ITOT.

 

[OneSeat]

VTI is slightly outperforming ITOT.

I owe you 22 cents.

 

[librahall]

I don't think international exposure is a big problem. U.S stock market includes not only the best-performing companies from other countries(e.g. China, Japan, EU) but also those large American companies already responsible for about half of the world's economic output(e.g. FAANG, Microsoft, McDonald, Starbucks...).

But I do feel 50% XIU is a little bit Canadian home bias. My PP is like 25% MNT, 18% ZSP, 7% XIU, 25% ZFL and 25% Cash.

In addition to that, I have ~10% of my total assets in a Variable Portfolio of individual US stocks and bitcoins.

 

[james4beach]

I don't think international exposure is a big problem. U.S stock market includes not only the best-performing companies from other countries(e.g. China, Japan, EU) but also those large American companies already responsible for about half of the world's economic output(e.g. FAANG, Microsoft, McDonald, Starbucks...).

But I do feel 50% XIU is a little bit Canadian home bias. My PP is like 25% MNT, 18% ZSP, 7% XIU, 25% ZFL and 25% Cash.

Yeah, many of these US giants are really global companies. Your allocation looks good as well.

And to demonstrate that we are "splitting hairs" on this foreign component, take a look at the back-test of @librahall 's allocation versus a 25% XWD weight (more data available than XAW). The result over several years differs by only 0.31% CAGR which isn't much. The chart also shows that they are virtually identical results.

It makes very little difference and ANY of these geographies can outperform the other. Canada (XIU) actually outperformed the S&P 500 from 2000-2018, so when you make an arbitrary weighting change like this, you can't tell if it's going to work out better or worse. In other words it's an arbitrary decision of very little consequence.

The choice also had no impact on max drawdown or the risk-adjusted return.