Gold is among the best performing asset class this year. While gold has come off its 2020 highs, most analysts have a bullish view. As an investor, you can invest in gold through several instruments. You can buy physical gold or a gold ETF. You can also invest in stocks of gold mining companies that eventually are a leveraged play on gold prices. You can invest in ETFs or mutual funds that invest in gold mining companies. Which are the best gold mutual funds and should you invest in them?
Are gold mutual funds a good investment?
First, gold mutual funds don't invest much in physical gold due to regulatory restrictions. They put most of their money into stocks of companies that are engaged in gold mining. If you want to mimic gold's returns, you should buy it physically or hold it through an ETF.
That said, the stock prices of gold mining companies have a high correlation to gold prices. Also, gold mining companies’ stock prices tend to rise or fall more than the movement in gold prices. You should consider gold mining companies or a polled investment vehicle like a gold ETF or mutual fund if you are looking at a leveraged bet on gold prices.
It’s worth remembering that while a gold mutual fund might outperform gold when gold prices rise, the opposite also holds true. All said, if you are looking at gold exposure, you should ideally split it between gold mining companies and physical gold.
Which are the best gold mutual funds?
There are several criteria that we can use to define a good gold fund. These include returns over the market cycle, fees, and the load structure. Ideally, investors shouldn't choose funds based on short-term performance. They should look at the long-term performance. It's also important to look at risk-adjusted returns as depicted by the Sharpe ratio. A higher Sharpe ratio indicates better risk-adjusted returns.
Looking at the five-year performance, the OCM Gold Fund has delivered the highest returns of 27.6 percent. It also has the highest returns over the last 10 years. The OCM Gold fund has been a consistent outperformer. It has a Sharpe Ratio of 0.811. However, the OCM Gold Fund's fees of 2.9 percent are much higher than the category average of 1.38 percent.
The Invesco Oppenheimer Gold and Special Minerals Fund delivered the second-highest returns over the last year. It has been a consistent outperformer. The Invesco Oppenheimer Gold and Special Minerals Fund's fee structure is also reasonable with a fee of 1.17 percent, which is below the category average. The Sharpe ratio is 0.746.
The EuroPac Gold Fund invests in gold mining companies based in Europe and the Pacific Rim. The fund has delivered the third-highest returns over the last five years. The EuroPAC Gold Fund's fees of 1.5 percent are slightly above the category average. It has a Sharpe ratio of 0.628.
The U.S. Global Investors Gold and Precious Metals Fund is another consistent performer. However, it isn't a purely gold fund. The fund invests in companies that produce or are involved in the distribution and fabrication of other precious metals like silver and platinum. However, the fund's Sharpe ratio of 0.737 is above the category average.
The VanEck International Investors Gold Fund has also consistently outperformed its peers. The fund's net expense ratio is 1.45 percent, while its Sharpe ratio is 0.682.