TBAR: Too Expensive Or A Great Bargain?

The innovation of the ETF industry has led to a wide range of products that now offer some manner of allocation to gold. Investors can gain exposure to the precious metal through a wealth of exchange traded products that allow them to play the gold as a commodity, but also as an equity investment by investing in the mining and exploration companies of gold. While the front-running ETP options have come from futures or physical based funds, there are other products that employ slightly different methodologies that investors are starting to take notice of [see also Eight Legendary Gold Investors].

The relatively new Gold Trendpilot ETN (TBAR) from RBS uses a unique strategy to offer investors a new way to play gold. This fund invests in an index that utilizes a systematic trend-following strategy to provide exposure to either the price of gold bullion or the yield on a hypothetical notional investment in 3-month U.S. Treasury bills, depending on the relative performance of gold on a simple historical moving average basis. While it may sound complex upon first glance, the strategy is relatively straightforward. The real question is whether or not this fund is worth purchasing, given that its expense ratio comes in at an unusually high 1.0% (when TBAR is invested in cash, the expense ratio drops to a still hefty 0.50%).

Under The Hood

This product may seem overly expensive on the surface, but a closer look at the inner workings of TBAR show a more practical expense structure. As noted above, this fund will invest in either gold futures, or 3-month Treasury Bills, but when the fund switches its holdings, it moves its fees as well. When TBAR is invested in gold, investors are paying 100 basis points, certainly an expensive fee by ETP standards. But when the moving average indicator is tripped, and the fund moves to T-bills, the fees shrink down to 50 basis points. While this isn’t necessarily cheap in relation to the rest of the industry, it’s important to consider the cost of making these investments on your own before overlooking TBAR as an overpriced product [see also Seven Factors To Consider When Evaluating Gold ETFs].

Theoretically, an investor could apply this strategy on their own, without the help of this ETN, but the costs can cut into a significant amount of portfolio value. Trading gold and T-bill futures on one’s own comes with numerous disadvantages. For starters, that would mean owning and understanding a futures account, which are not meant for the average investor as they can be quite complex. Second comes the commission fees; trading these futures back and forth based on the moving averages has the potential to accrue significant commission fees, which can add up very quickly for those with relatively small positions. The final disadvantage comes on the tax side of the equation. Capital gains taxes from the constant moving of positions can lead to a major headache come April as well as take away a significant amount of the gains realized [see also The Ultimate Guide To Gold Investing].

Sidestepping Trend Following Pitfalls

TBAR has the potential to help investors avoid some of the most common drawbacks of trend following strategies, including big commissions and less-than-optimal tax scenarios. And it does this thanks in large part to the structural nuances of this product; as an exchange-traded note, TBAR represents a unique solution to issues that have historically frustrated investors.

Investors implementing a similar strategy on their own would be required to regularly buy and sell futures contracts. A position in TBAR, on the other hand, requires no maintenance on the part of investors; exposure is automatically switched whenever the relevant indicator is tripped. That has the potential to save a boatload in commissions, particularly for investors with relatively small portfolios wishing to implement a trend following strategy with gold.

The tax advantages should not be overlooked either. The do-it-yourself approach that requires regularly buying and selling futures contracts also results in incurring capital gains taxes on a fairly regular basis. That has the potential to eat into returns and send the effective tax rate higher. TBAR, for the time being at least, avoids that dilemma as well; as an ETN, investors should expect to be taxed only when the position is liquidated, regardless of how many times exposure switched back and forth between gold and cash.

At first glance, TBAR’s price tag may seem unreasonably high, considering that IAU offers exposure to physical bullion for 25 basis points annually. But here is a lot more to the story than meets the eye, and consideration of the potential savings in other areas makes this product suddenly much more appealing. For investors who want to buy and hold gold, TBAR doesn’t make sense. But for those looking to combine exposure to gold with a trend following strategy, this creative and unique ETN might end up being the bargain of the year.

Disclosure: No positions at time of writing.

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