(ETF.com) [This ETF Industry Perspective sponsored by Wilshire Phoenix.]
Wilshire Phoenix created an innovative index methodology that seeks to reduce the volatility of a given asset, and which can be applied across multiple asset classes. The Wilshire wShares Enhanced Gold Trust (NYSE: WGLD), which invests in physical gold, is the first product that Wilshire Phoenix (WP) is bringing to market that employs its novel index methodology. The physical gold space is an area of investment that Bill Herrmann, managing partner of WP, says has not seen any meaningful innovation. Here, Herrmann explains how the methodology works and the potential benefits versus an investment in a stand-alone asset.
ETF.com: What makes this an enhanced gold ETF? How is it different from the existing gold ETFs out there?
Bill Herrmann: Existing gold ETFs simply offer exposure to gold. And that is not a bad thing, but they are all essentially the same in that regard. The most innovation that has happened in the gold ETF market is the physical location of where the gold is stored, or the types of gold bars that an ETF holds. There’s no real innovation in the gold ETF space.
We are taking a more thoughtful approach. People often classify gold as a safe haven asset, but it’s a mistake to say that it doesn’t come with risks and challenges. And, I think some of those challenges for investors are determining allocation size and how that allocation should evolve as market conditions change. This challenge is made more difficult by the fact that the gold market can be quite volatile, which can be a surprise for investors given gold’s “safe haven” status.
Currently, there are no ETFs in the gold space that address these challenges. In fact, there are no ETFs that use our method of applying volatility in a way to not only seek to reduce risk but also seek to outperform the asset itself. That is where we are different.
With respect to determining the initial sizing and the ongoing exposure, we call what WGLD uses “adaptive exposure.” What that means is that WGLD’s index, and consequently WGLD, will automatically adjust in response to changing market conditions. Generally speaking, if the realized volatility of gold is rising, then the exposure goes down, and vice versa.
In addition to using the volatility of gold, WGLD’s index also employs an equity volatility component, as measured by the S&P 500. If the volatility of the S&P 500 rises significantly, gold receives an even higher allocation. But WGLD will never exceed a 100% allocation to physical gold—there’s no leverage on the product and there’s no use of futures. The only holdings are physical gold and cash, and the physical gold holdings can range from as a high as a full 100% allocation to a minimum allocation of 50% depending on market conditions.