With the returns of gold rivaling that of the US equity market, Standard & Poor’s has launched the S&P 500 Gold Hedged Index.
The index seeks to simulate the returns of an investment strategy which is long the total return of the S&P 500 stock market index and long gold futures contracts, allowing investors to participate in the returns of the US equity market while hedging against a decline in the value of the US dollar versus gold.
Standard & Poor’s has licensed UBS to create and launch investment products based upon the index.
“In a gold-hedged strategy, investors are seeking to eliminate the risk of US dollar fluctuations and are therefore willing to sacrifice potential currency gains against gold,” says Liz Taxin, director of strategy indices at S&P Indices. “By holding long gold futures contracts, investors stand to gain when the US dollar loses value as expressed in the dollar price of gold.”
The S&P 500 Gold Hedged Index is calculated as a combination of a long S&P 500 position overlaid with a long position in Comex gold futures. The hedge only protects against adverse movements in the relative value of the US dollar, as expressed in the dollar price of gold. Stock market risk is not hedged in any way.
The results of a gold-hedged index strategy, versus that of an un-hedged strategy, vary depending upon the movement of the gold futures contract and the US dollar. By holding long gold futures contracts, investors may gain when the US dollar loses value as expressed by gold. Conversely, they may lose when the opposite occurs.
The index is rebalanced monthly to equalize notional exposure to equity and gold. The positions are rebalanced to equal weights on the day of rebalancing.
