Gaining exposure to the gold market has never been easier. Investors are left with a bevy of choices. You can invest in: gold mining stocks, gold bullion and coins, and gold futures contracts. However, the easiest and most convenient way to gain access to the gold market is through Gold ETFs.
An ETF or exchange traded fund has similarities to a managed futures fund as well as security that trades on the stock market. You see, an ETF trades just like a stock. But they are not companies, instead they invest in the underlying asset, just like a managed futures fund would do.
Gold ETFs have lower fees than managed futures and don’t have to go under the same type of regulatory scrutiny as mutual funds do. Gold ETFs invest in gold assets and divide ownership of that into shares. They are traded on the stock market the same way equity securities do.
Let’s take a look at who the leading gold ETFs are.
The Best Gold ETFs
SPDR Gold Shares (NYSE: GLD): The largest gold ETF in the market with over $30B in net assets. It seeks to replicate the performance of the price of gold bullion, net of expenses.
The sole assets of the Trust are gold bullion, and, from time to time, cash. Structure allows for baskets to be created and redeemed according to market demand, creating liquidity.
All of the Trust’s gold is held by the Custodian, HSBC Bank plc., in their London vault except when the gold has been allocated in the vault of a sub-custodian.
GLD has a net expense ratio of .40% and holds over 26M ounces of gold.
From a liquidity standpoint, trading GLD is easy, bid/ask spreads are tight and average daily trading volume exceed 5M shares. Option contracts on GLD are also issued.
The price of a GLD share is ten times smaller than one ounce of gold. Typically, fractional gold bullion is priced at a higher premiums, putting small investors at a disadvantage. GLD allows small investors a lower barrier for entry into the gold market.
iShares Gold Trust (NYSE: IAU): Allows investors to gain exposure to the day-to-day movement of the price of gold bullion. The Trust buys and holds, it is not engaged in the daily trading activities of gold, nor does it attempt to profit off short-term fluctuations in the price of gold.
The Trust has net assets that are just shy of $10B and holds over 7M ounces of gold. It has an annual report expense ratio of 0.25%
The price of one share of IAU is 100 times smaller than the price of an ounce of physical gold.
The iShares Gold Trust is the most popular gold ETF based the average trading volume.
ETFS Physical Swiss Gold Shares (NYSE: SGOL): The investment objective of the Trust is to replicate the performance of gold bullion, net of expenses. It holds allocated physical gold bullion bars stored in secure Swiss vaults. The Custodian is J.P. Morgan Chase Bank.
SGOL has net assets that exceed $1B, holding more than 830K ounces of gold bullion. It has a net expense ratio of 0.39%
The price of one share of SGOL is ten times smaller than the price of one ounce of physical gold.
VanEck Merk Gold Trust (NYSE: OUNZ): The primary objective is to provide investors with a low-cost way to gain exposure to the gold market. Shares can be converted to physical gold. In addition, shares are structured to reflect the performance of gold bullion, net of expenses. The Custodian is J.P. Morgan Chase Bank.
How It Works:
Investors buys shares in OUNZ, the Trust holds gold in the form of allocated London Bars. The investor can submit delivery application and shares of OUNZ. The investor can receive coins/bars without experiencing a taxable event. The gold is converted into either coins or bars as requested by the investor and is then delivered to them.
Aside from London Bars the Trust holds, investors may take delivery of 1 ounce coins such as: Australian bars, Australian Kangaroos, Canadian Maples, American Eagles, American Buffalos. Also available are 10oz Australian bars. Delivery fees apply.
Taking delivery of gold is not a taxable event as investors are simply taking possession of gold that they already own.
OUNZ has a net expense ratio of 0.40%. The Trust has approximately $134M in total net assets.
One share of OUNZ is priced nearly ten times lower than an ounce of physical gold bullion.
Leveraged Gold ETFs Don’t Make Sense
ProShares Ultra Gold (NYSE: UGL): Seeks a return that is 2X the return of the daily performance of gold bullion as measured by the U.S. Dollar price for delivery in London.
The prospectus states that it attempts to track its benchmark for a single day and that you can expect differences once you go beyond that time frame.
UGL has net assets that exceed $80M and carries a net expense ratio of 0.95%
Here’s how its annual returns compare to GLD:
Source: Morningstar
In 2016, GLD was up 8.03% , UGL was also up, but just 11.67%. However, in 2010, UGL was up 58.28% while GLD was up 29.27%
That said, this type of divergence makes it difficult for long-term investors to get behind a leveraged gold ETF. On the other hand, leveraged ETFs are great instruments for those wanting to day trade or take short-term swing positions.
Why You Should Consider Gold ETFs
Gold ETFS provide investors with easy access to the gold market. They make it easy to monitor the day-to-day activity in gold prices. The barrier of entry is low. Investing in fractional gold coins puts small investors at a disadvantage because fractional gold coins are priced at a higher premium. In addition, investors can save on fees from having to store their physical gold.
Gold ETFS can be used as a tool to help diversify a stock portfolio. They tend to have a negative correlation to to the S&P 500, making it a true hedge against stock market risk.
You have plenty of Gold ETF options to choose from. Make sure to read the prospectus of each one and compare its actual performance to that of gold before making your choice.
