Harvest Portfolios Group Inc. launched a global gold ETF this month. (Jan.15, 2019)  In a Q&A, Harvest President & CEO Michael Kovacs explains why the company is launching the Harvest Global Gold Giants Index ETF (TSX: HGGG) now, the thinking behind this unique ETF and why the ETF aligns with the Harvest value strategy of conservative growth and income.

Why is Harvest launching a gold ETF?

We have been looking at the gold market for some time, especially gold company shares. They have been in a bear market for the better part of six years, so share prices are low. We see considerable value there.

A lot of the smaller companies are out of business because they couldn’t make money at these lower prices. Others that are struggling are being acquired by the big companies. Consolidation is a sign of a market bottom and while there is always downside risk in investing, we think a lot of that risk is out of the market.

So your focus is just the largest global producers?

Yes. Large firms are able to take advantage of the situation. So we looked at the top global gold companies – the biggest by market cap – and are focusing on just the top 20. So if gold rises there is a lot of upside potential.

The other thing is that we’re in the late stages of the economic cycle. I don’t know whether we are in the ninth-inning, or we have some extra innings ahead, but at some point US markets will start to weaken. Interest rates will top out and probably decline. We will see some decline in the US dollar as well. The US dollar has been on a tear and like any cycle it will probably come to an end.

At that point investments like gold make a lot of sense. There’s inherent leverage in the equities if gold prices rise.

Why is that?

In a simplified example, let’s say you are Barrick Gold Corporation producing gold at $800 an ounce. Gold is worth about $1,250 an ounce, so your margin is $450. If gold rises by $250 to $1,500, you’re increasing your profit margin by 55%. That goes directly to the bottom line.  So we think it is an opportune time to be looking at large gold producers.

Are you worried about inflation?

We do not see a lot of inflation. There may be some inflationary pressures, but the world has changed so much with technology. The U.S. Federal Reserve has been talking about more inflation for years and we’re still looking at a little over 2%. That’s very low.

What are the main features of the Harvest Global Gold Giants Index ETF?

We’re working with a German Index Provider called Solactive, which helped us build our gold index.  It is not actively managed, rather a passive index. Their criteria is to choose by market weight the top 20 gold miners in the world. Most of those are in Canada, the United States, the UK and Australia. Because of the passive index structure, there is a 40 basis point management fee. That is the lowest among gold ETFs in Canada.  There is no distribution policy, though at the end of year when net income is calculated, if any distributions have been collected, they will be paid. So no monthly income with this fund.

Is the Harvest Gold Fund unique?

There are other gold ETFs, but none are as focused. Many have a cross-section of different types of miners in them – gold as well as other metals. Some include firms with small market capitalization along with the larger firms. Some are just physical metal-based.

This fund is very simple to understand. It includes 20 of the largest global gold companies in the world. It is equally-weighted.

Who is this fund suitable for?

Most of our clients are advisors, but the HGGG ETF may be suitable for people who are concerned that we are in the late stage of an economic cycle and that the US dollar may weaken. So, they are looking to be a bit more defensive with their portfolio. Or, it could be somebody who sees value in the gold sector and wants to capture the top 20 in one product.

What would their investing horizon be?

Anybody taking a position should be looking out over the next three years as we go through the turn in the cycle.

What’s your market outlook for 2019?

We haven’t traditionally made calls on the market. We want to own quality for the long term. Markets tend to average 7% to 8% a year, so if you can average 8% or 9% on a compound rate you are doubling your money every nine years.  People tend to step up on the risk curve for additional returns and forget about the compounding power of those steady returns over time.

And that’s what we’re about at Harvest. We don’t try to shoot out the lights, we just try to bring good ideas and good quality to the marketplace.

We think that’s what the Harvest Global Gold Giants Index ETF can provide.

For more on the Harvest Global Gold Giants Index ETF  click here.

The views and/or opinions expressed in the blog are of a general nature and are for informational purposes only. Blog contents should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage personal investment strategies. Investors should consult their investment advisor before making any investment decision.