New Gold ET is still an untapped potential at bourse

Immediately after Kenya’s Supreme Court’s unprecedented September 1, 2017 annulment of the August 8 presidential elections, the NSE 20-share index declined by more than five percent triggering a trading halt.

Prior to the institution of the halt, major counters had dropped between six to 9.5 percent save for the less spoken about Barclays NewGold Exchange Traded Fund.

What is an Exchange Traded Fund (ETF)? An ETF is a type of fund that owns assets like stocks, commodities, or futures, but has its ownership divided into shares (or units) that trade on stock exchanges.

Consequently, investors can buy and sell ETFs whenever they want during trading hours at low trading costs.

The Barclays NewGold ETF is currently the only ETF listed at the Kenyan bourse. The promoters, Absa purchased, insured and stored pure gold bullion in custodian vaults in London. Units were then listed in the Johannesburg Stock Exchange. Later on, cross listings were done in Botswana, Mauritius, Namibia, Ghana and Kenya.

Kenya, in particular, was allocated 400,000 units worth Sh500 million to be traded at the Nairobi Securities Exchange. Unfortunately, since its listing on March 27, 2017, the ETF has only sold 12,600 units worth Sh15.8 m.

These numbers should not discourage local investors because as experienced in South Africa, the ETF market growth was initially slow in terms of uptake by investors, but its popularity later soared after the 2008 global financial crisis.

Indeed, it shielded from harm the few fund managers who prior to the crisis had purchased the gold ETF for diversification purposes.

The rainbow nation currently hosts two gold ETFs with Absa and Standard bank as promoters.

Contrary to the performance in Kenya, the NewGold ETF at the Botswana Stock Exchange is doing quite well. This is probably because major fund managers in that jurisdiction are South African subsidiaries who probably understand the benefits of ETFs better from their past experiences.

Is the New Gold ETF an asset class that our fund managers in Kenya should consider for diversification purposes? I believe it is.

Allotting between 5-10 percent of your investment portfolio to gold ETFs is a wise idea as it will help keep the portfolio robust and the returns stable.

The relatively small number of units available for trade in Kenya would of course need to be increased to provide sufficient product for such a scale of investment.

In this regard, the beauty of an ETF is more units could be issued at any time through the acquisition and storage of an equivalent value of gold bullion to the units to be issued.

Like all investments, precious metal ETFs (e.g. gold or platinum) do have risks. The value of an ETF unit may go up or down depending on the spot price of the precious metal and/or the change in the exchange rates. Past performance is ultimately not a good indicator of future performance. Investing in ETF units will not make an investor the owner of the underlying asset but will assist them in tracking its price.

On the positive side, investing in a gold ETF is a simple way of gaining exposure to returns from value escalation of the underlying gold.

Its liquidity is through intraday market making services by Barclays Financial Services Ltd. The counter has minimal tracking error meaning the returns of the ETF is equal to the return of the underlying metal priced in shillings less any applicable fees. The physical metal is segregated and stored in secure custodial vaults. The exchange traded product has transparency in value meaning you can obtain daily gold prices and the gold ETF prices online, in major newspapers, TV and other news sources.

Analysis of the growth of the gold ETF is pegged on the future demand for gold. Gold is too expensive to use by chance. As a result, once a use is found for gold it is rarely abandoned for another metal. Gold is used in dentistry for cavity filling due to its ductility and chemical passivity. In electronics and computers, gold is the top conductor of electricity thus it’s found in small portions in many electrical devices like mobile phones, TVs, GPS devices and satellites. Remember the winning athlete will always receive a gold medal. Religious statues, idols and jewellery are also key consumers of gold.

This combination of growing demand, few substitutes, and limited supply will cause the value and importance of gold to increase steadily over time.