What is IGLD? (Pros, Cons, and Strategies)

If you're looking for a way to diversify your investment portfolio and seek a reliable source of income, you might want to consider specialized ETFs. One such option is IGLD, the FT Vest Gold Strategy Target Income ETF. In this blog post, we'll explore what IGLD is, its advantages and disadvantages, and some effective strategies for making the most out of your investment.

What is IGLD?

IGLD, or the FT Vest Gold Strategy Target Income ETF, is a unique investment vehicle that combines the stability of gold investments with a targeted income strategy. This ETF is designed to provide investors with income, and also to hedge against inflation and economic downturns.

IGLD tracks the Gold Enhanced Value Index, which invests in gold-related securities while incorporating an options overlay strategy to enhance income yields.

Key Features of IGLD

• Incorporates investments in gold and gold-related securities.
• Uses a covered call options strategy to enhance income.
• Aims to provide both growth and income by leveraging the stability of gold and the yield from the options strategy.

The gold-related securities include not just physical gold but also equities in companies that operate in the gold mining sector. The options overlay strategy primarily involves selling covered call options to generate additional income from the investment.

IGLD Composition

IGLD consists of a diversified portfolio of gold and gold-related assets, with a significant portion invested in physical gold or gold ETFs. Additionally, it includes shares of companies involved in gold mining, exploration, and production. The key differentiator is the use of covered call options to generate income, which sets it apart from traditional gold investments.

Pros of IGLD

Stability and Inflation Hedge

Gold has long been considered a safe-haven asset, particularly during economic downturns and periods of high inflation. IGLD leverages this stability while also offering the potential for income generation. This double advantage makes it a compelling option for risk-averse investors looking to safeguard their portfolio.

Income Generation via Options Strategy

The covered call options strategy deployed by IGLD is designed to generate consistent income. This is particularly beneficial for investors who seek a regular income stream without having to sell their principal asset. Over time, these income yields can contribute significantly to your overall return.

Diversification

IGLD provides a unique way to diversify your investment portfolio. By combining gold, an asset class with typically inverse correlation to stocks and bonds, with income-generating strategies, investors get the best of both worlds. This can enhance overall portfolio performance and risk management.

Cons of IGLD

Limited Upside Potential

While selling covered call options generates income, it also limits the possible upside gain. If the price of gold or gold-related securities rises significantly, the maximum profit is capped due to the nature of the options contracts. This could mean missing out on substantial capital appreciation.

Expense Ratio

ETFs that deploy complex strategies like covered call options often have higher expense ratios. IGLD’s expense ratio might be higher compared to simpler, traditional gold ETFs, which could impact long-term returns.

Commodity Price Risk

While gold is generally stable, it is not immune to price fluctuations. Various factors, such as changes in global economic conditions or shifts in currency values, can affect gold prices. Investors should be aware that these risks, while potentially mitigated by the options strategy, can still impact returns.

IGLD Investment Strategies

IGLD can be a valuable part of a diversified investment strategy, particularly for those looking to balance income generation with the stability of gold. Here are some recommended strategies for investing in IGLD.

Long-term Investment Strategy

For those with a long-term investment horizon, IGLD can serve as a core holding. The stability of gold, combined with the income from covered call strategies, makes it a robust choice for investors aiming for a steady and reliable return. Given its inflation-hedging properties, it is particularly suitable for long-term financial planning and retirement accounts.

Income-focused Strategy

If you are an income-focused investor, you might consider allocating a portion of your portfolio to IGLD for its high-yield potential. The covered call strategy can provide a regular income stream, making it an attractive option for those who need consistent cash flow, such as retirees.

Portfolio Diversification

For those looking to diversify their portfolio to reduce risk, incorporating IGLD can balance out the volatility of stocks and bonds. Given its unique characteristics, it provides an extra layer of risk management by adding an asset class that typically performs well during periods of economic uncertainty or inflation.

Conclusion

IGLD offers a unique combination of the stability of gold and the income potential of a covered call options strategy. While it has some limitations, such as capped upside and a potentially higher expense ratio, it provides significant benefits in terms of income generation and risk diversification. Whether you're planning for long-term growth, seeking regular income, or aiming to diversify your portfolio, IGLD presents a compelling investment option worth considering.