Gold funds provide investors with exposure to the commodity without having to deal with the hassle of taking delivery of or delivering physical gold assets, which is typically required in the commodities futures market. Gold funds may be used as a hedge against geopolitical instability or interest rate risk.
Although Vanguard does not offer a pure gold fund, it does offer a fund that invests around one-quarter of its portfolio in precious metals and mining companies, providing indirect exposure to this market: The Vanguard Global Capital Cycles Fund (VGPMX).
Fund Characteristics
VGPMX looks for opportunities arising from changing investor sentiment resulting from cycles of under- and overinvestment in capital-intensive industries. At least 25% of the fund is invested in precious metals and mining securities.
This mutual fund was established on May 23, 1984, with the sponsorship of Wellington Management, which later became a subsidiary of Vanguard. As of December 2021, the fund has generated an average annual return of 4.39% since its inception.
The fund's benchmark was the spliced index, which includes data from the S&P/Citigroup World Equity Gold Index through June 30, 2005, the S&P Global Custom Metals and Mining Index through September 25, 2018, and the S&P Global BMI Metals & Mining 25% Weighted Index thereafter. The benchmark return over the same period has been 4.28%.
The Vanguard Global Capital Cycles Fund charges a relatively low annual expense ratio of 0.35%, which is lower than the average expense ratio of mutual funds with similar holdings. It requires a minimum investment of $3,000.
Fund Strategy
According to the Fund's prospectus, Vanguard Global Capital Cycles is actively managed and invests in U.S. and foreign equity securities, where it seeks to generate above-average compounded returns by purchasing securities in companies and industries where capital spending is declining, and seeks to avoid companies, assets, and business models that can be easily replicated.
Companies, assets, and business models that cannot be easily replicated may include those with differentiated offerings, a low-cost advantage, or that maintain an advantage over competitors in their same industry. The Fund typically invests across a range of sectors, a mix of developed and emerging markets stocks, and typically holds companies across the market capitalization spectrum.
The fund also concentrates its investments (i.e., hold 25% or more of its net assets) in securities of issuers whose principal business activities are in the precious metals and mining industry
As of Dec. 2021, the fund holds 45 stocks and has total net assets of $1.8 billion. As of the fiscal year ending in January 2022, it has a turnover rate of 34.7%. The fund holds global stocks, and its country exposures are concentrated in North America, Europe, and emerging markets.
Risk and Modern Portfolio Theory Statistics
Since the Vanguard Global Capital Cycles Fund provides specialized exposure and may invest a substantial portion of total net assets in foreign securities, it is exposed to currency risk, country or regional risk, non-diversification risk, industry concentration risk, stock market risk, and investment style risk.
As of Jan. 2022, based on trailing 10-year data, the VGPMX has an average annual standard deviation (a proxy for risk) of 26.17% and a Sharpe ratio of -0.04. When measured against the MSCI ACWI NR USD Index—the global standard index, it has an alpha of -12.48 and a beta of 1.00.
The fund's Sharpe ratio indicates it provided investors with an adequate average annual return on a risk-adjusted basis. Its alpha, however, indicates it underperformed the global standard index by an average of almost 12.48% annually over this same period.
Based on modern portfolio theory (MPT), the fund is only suitable for highly risk-tolerant investors. Moreover, the Vanguard Precious Metals and Mining Fund is best suited for long-term investors seeking an investment that primarily holds foreign securities in the precious metals and mining sector. The fund should be held as a satellite holding in a diversified portfolio with a long-term investment horizon.
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