Gold Is Surging — But Your ETF Might Already Hold It
Many Canadian investors are unknowingly benefiting from gold’s rally through existing ETF holdings, raising questions about potential overexposure and diversification.
Gold has been one of the top-performing asset classes so far this year and is poised to continue its upward trajectory through the rest of 2025. While its safe-haven qualities have been an underlying reason as to why investors have gravitated towards it, given recent macroeconomic events, the idea of gold as a core holding within one’s portfolio is also gaining traction.
While the recent increase in gold may have sparked the interest of many Canadian investors, unbeknownst to them, they may already have significant exposure to the asset class through gold equities.
Looking below the surface
The strong performance of the S&P/TSX Composite Index so far this year is mainly driven by the excellent results of the materials sector, which includes mining companies involved in gold extraction. In looking at the top 10 companies within the S&P/TSX Capped Materials Index, eight of them are focused on gold.
As gleaned from the table above, the materials sector in Canada is heavily influenced by precious metal prices. With gold climbing to multi-year highs, Canadian mines have driven the sector’s performance ahead of all others.
Avoiding overexposure
With gold’s strong performance, some investors may instinctively add gold-focused solutions to their portfolios out of fear of missing out (i.e., FOMO), without properly considering whether they already have exposure to the asset class, highlighting the significance of the behavioral aspects of investing.
For investors who hold broadly diversified solutions, such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC.TO), which consists of a selection of the largest (by market capitalization) and most liquid Canadian equity securities, there is ample exposure to gold equities. When comparing holdings between XIC and the iShares S&P/TSX Global Gold Index ETF (Ticker: XGD), approximately 28 holdings (i.e., over 50% of XGD’s holdings) are common between the funds, resulting in a fund overlap of 10.95%. Since both funds have exposure to the same underlying holdings, a measure of overexposure is present, which in turn reduces the diversification effect.
When a similar comparison is made between XIC and another gold-focused fund solution, such as Harvest Global Gold Giants Index ETF (Ticker: HGGG), the takeaway is similar, with over 50% of the fund’s holdings also being in XIC.
Simply put, Canadian investors who are broadly diversified are already benefiting from the gold rally, even if they are unaware of it.
Takeaway
Investors who are broadly diversified benefit from having different return exposures within the portfolio; however, it is also important to understand what these return exposures are to avoid increasing one's exposure unnecessarily and to preserve the benefits of diversification.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
