Gold, bitcoin are moving beyond market hedge to boost portfolio income

Gold keeps trading up to new record high prices. Bitcoin, while struggling to break out above recent record levels above $100,000, continues to find more mainstream adoption. But both the classic market safe-haven and its more risky new crypto rival are doing something other than just move up and to the right on the chart for investors: within some exchange-traded funds, they are also generating income.

Investors want exposure to alternative assets that do not move in lockstep with stocks and bonds. That comes at a time when stocks are also at record prices, and returns are concentrated in a handful of mega-cap tech stocks that now represents roughly 40% of the S&P 500. Bonds, meanwhile, have traded with greater volatility than their historical role in a classic 60-40 portfolio would suggest, and that has left investors less comfortable with fixed-income as a traditional component of portfolio diversification strategy.

Even with less confidence in bonds, investors still want the steady income distributions associated with fixed-income. Attaching income overlays to non-yielding alternative such as gold and bitcoin is one way to satisfy these investor demands.

“If your goal is to provide a hedge against volatility in the equity and bond market, then gold can provide a bit of a safe haven. If you’re looking for reward opportunities, bitcoin has been very rewarding,” said Todd Rosenbluth, VettaFi’s head of research, on CNBC’s “ETF Edge.”

“If you’re looking for diverse ways to get income, then these covered call strategies that are here have become increasingly popular,” he added.

The latest sign that Wall Street thinks this approach can work came this week, when the world’s largest asset manager, BlackRock, also the biggest ETF company through its iShares family, filed for a bitcoin premium income ETF.

Simplify Asset Management was one of the first to test this approach. Its Simplify Gold Strategy Plus Income ETF (YGLD) and Simplify Bitcoin Strategy PLUS Income ETF (MAXI) give exposure to gold or bitcoin futures and add an options strategy on top to generate income.

“For clients who are funding this from a bond portfolio, they don’t have to sacrifice on that income potential,” Paisley Nardini, managing director and head of multi-asset solutions at Simplify, said on “ETF Edge.”

Some financial advisors have made the case that as the 60-40 portfolio fails to provide investors what it had in previous decades, larger allocations will be going to cryptocurrencies.

In terms of investor adoption, these ETFs remain relatively small. And compared to the traditional exposure to these alternatives, it’s not even close.

The Simplify Bitcoin Strategy PLUS Income ETF has a little over $51 million in assets under management, according to VettaFi. The iShares Bitcoin Trust ETF (IBIT), which is its largest holding (about 83% of the fund), has roughly $85 billion in assets.

YGLD has approximately $44 million in assets, according to VettaFi. Traditional gold ETFs remain far larger. SPDR Gold Trust (GLD), for example, has approximately $120 billion in assets under management, according to VettaFi, while SPDR Gold Mini Shares Trust manages over $20 billion in assets.

NEOS Investments’ NEOS Gold High Income ETF (IAUI) also aims to offer monthly income by combining exposure to gold with enhanced returns from selling covered call options. IAUI has assets of over $115 million, according to VettaFi.

Performance- and yield-wise, the gold and bitcoin income ETFs diverge. Simplify’s bitcoin income fund, MAXI, has posted a year-to-date return of 12%, versus 17% for the iShares core bitcoin ETF, IBIT, according to ETFAction.com data. But it has generated a trailing 12-month yield of over 43%. The Simplify gold income fund, YGLD, has a year-to-date return of 69%, versus roughly 42% for the SPDR GLD ETF. Its trailing 12-month yield is right around 5%.

Still, Rosenbluth said the approach is an indication that investors are rethinking portfolio construction. BlackRock’s decision to offer an ETF in the bitcoin income space will only serve to further confirm there is interest in the market in finding new ways to invest in these alternatives.

Gold has long been treated as a safe haven while bitcoin has been used as a risky diversifier. Adding income overlays changes those roles, Rosenbluth said, but caters to the growing demand. The income overlay can blunt performance qualities that make gold attractive, and cap the return upside that draws investors to bitcoin. However, Rosenbluth said it may appeal to some investors, particularly retail investors seeking high yields.

“When you see a high level of income kicking off a strategy, that’s what captures investors attention, especially at the retail level,” Nardini said on “ETF Edge.”

The income approach, using covered call options, has exploded in popularity in the ETF space outside the gold and bitcoin context, with equity income funds like JPMorgan’s JEPI leading a new approach to stock investing, while other new ETFs are combining exposure to a select group of stocks, such as Warren Buffett’s picks, with an income payment, or the portfolio of Bill Ackman with a similar income component.

Rosenbluth added that bringing these strategies into an ETF structure reflects the growing adoption of ETFs as a go-to approach to market exposures. “I think there’s just an ease of use. It’s a more efficient way of accessing the market and using ETFs as the vehicle to do so,” Rosenbluth said.