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 offers a precious metals and mining mutual fund that gives exposure to a niche area of the precious metals market. The Vanguard Precious Metals and Mining Fund is a mutual fund that provides specialized exposure to the equity precious metals sector.
The Vanguard Precious Metals and Mining Fund invests primarily in stocks included in the precious metals and mining industries. The mutual fund was issued on May 23, 1984, with the sponsorship of Vanguard. As of Sept. 30, 2015, the fund has generated an average annual return of 3.24% since its inception. The spliced index, which includes data from the S&P/Citigroup World Equity Gold Index through June 30, 2005, and the S&P Global Custom Metals and Mining Index thereafter, had an average annual return of 2.01% over the same period.
The Vanguard Precious Metals and Mining Fund charges a low annual expense ratio of 0.29%, which is 80% less than the average expense ratio of mutual funds with similar holdings. It requires a minimum investment of $3,000 and is advised by M&G Investment Management Limited.
Under normal market conditions, the fund invests at least 80% of its total net assets in stocks of U.S. and foreign companies primarily engaged in mining, development, fabrication, processing, exploration, distribution, marketing or other business activities related to metals or minerals. The companies mainly engage in activities related to gold, silver, diamonds, platinum, or other precious metals or rare minerals. The remaining companies comprising the fund are principally engaged in business activities related to copper, nickel, or other common metals or minerals. Additionally, the fund may invest up to 20% of its total net assets directly in gold, silver, or other precious metal bullion and coins.
As of Sept. 30, 2015, the fund holds 62 stocks and has total net assets of $1.6 billion. As of the fiscal year ending in January 2015, it has a turnover rate of 62.3%. The fund holds mainly foreign stocks, and its country exposures are 58.6% in Canada; 24.8% in the United Kingdom; 6.8% in the United States; 2.8% in Australia; 2.7% in Sweden; 2.3% in other countries; and 2% in Belgium. The Vanguard Precious Metals and Mining Fund is top heavy, allocating 48.9% of its total net assets in its top 10 holdings.
Risk and Modern Portfolio Theory Statistics
Since the Vanguard Precious Metals and Mining Fund provides specialized exposure and may invest up to 100% of its 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 Sept. 30, 2015, based on trailing 15-year data, the Vanguard Precious Metals and Mining Fund has an average annual standard deviation, or volatility, of 30.29% and an average annual return of 6.26%. It has a Sharpe ratio of 0.31 and a Sortino ratio of 0.43. When measured against the MSCI ACWI NR USD Index, the global standard index, it has an alpha of 5.77, a beta of 1.17 and a Treynor ratio of 3.95.
The fund’s Sharpe ratio indicates it provided investors with an adequate average annual return on a risk-adjusted basis. Its alpha indicates it outperformed the global standard index by an average annual 5.77% over this period. However, based on its beta, the fund was theoretically 17% more volatile than the global standard index. Its Treynor ratio indicates it provided an average annual rate of 3.95% per unit of risk.
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.