Not All Physical Gold ETFs Built The Same

December 18, 2012

Gold ETFs may appear to be same, until you consider expense ratios and vaulting.

With four different ETFs offering physical storage of gold, investors may feel like they are at Best Buy trying to find the best plasma TV.

Fortunately, there are some key differences between the funds that will make the decision easy, as long as you care about these distinctions.

But if all you care about is investing in gold without having to bury it in your backyard or store it in a safe, the decision is even easier: Buy the iShares Gold Trust (NYSEArca: IAU) and use the savings to buy more.

The four grantor trust ETFs that hold physical gold differ mostly in their expense ratio and vaulting, with little else differentiating them. After all, gold in Mumbai is the same as gold in Carson City, Nev.

The problem is, some gold investors aren’t just concerned about how much it costs to access the yellow metal; they also care about where that metal is held.

After all, if you’re buying gold to protect against the apocalypse or currency crisis, you want to be sure your gold is not only where your custodian says it is, but that it is deposited in a place that isn’t likely to see a government confiscation or re-hypothecation.

In other words, some investors want to know that their gold is accounted for and insulated from the corruptibility of elected officials and banking magnates.

Without trying to paint the entire gold investment community with too broad a brush—and dipped in a bucket of conspiracy theorist paint—it’s still important to touch upon each physically backed gold ETF’s value proposition and, by extension, which investors are likely to be wooed by it.

Let’s start with the SPDR Gold Shares (NYSEArca: GLD), the $70 billion behemoth. GLD is more expensive than the three competing physically held gold ETFs based on its headline expense ratio. The round-trip retail cost of GLD is higher than IAU, equal to SGOL and cheaper only than AGOL.

Where GLD really makes its mark is with institutions. Because the fund trades more than $1 billion a day, active traders and money managers get the best liquidity available.

Moreover, the fund has a deep and active options market that extends the liquidity of the ETF beyond just the primary and secondary market.

Moreover, because the handle on GLD is more than 1/10 an ounce of gold compared with 1/100 an ounce of gold for IAU, the number of shares required to get the same nominal exposure in GLD is 10 times less than for IAU.

For retail investors trading through their online broker, this doesn’t matter, but for institutions paying a per-share commission to authorized participants or liquidity providers, this matters, and it pushes the cost equation for GLD well below that for IAU.

As for vaulting, GLD’s gold is vaulted in London and constitutes one of the largest gold hoards in the world, let alone the gold ETF segment.



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