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Paul Baiocchi
ETF.com Analyst Blogs

Not All Physical Gold ETFs Built The Same

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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.

IAU

IAU is the obvious choice for the buy-and-hold retail gold investor. The round-trip retail cost for IAU is the cheapest in the segment, making it a no-brainer for anyone unconcerned about the location of the gold held by the fund. As far as that goes, IAU’s gold is vaulted around the world.

SGOL And AGOL

These two ETF Securities portfolios are for the discerning gold investors who want the peace of mind of knowing that their gold is held in a specific place.

Both funds charge 1 basis point less than GLD, but are nowhere near as liquid. SGOL is much more popular and liquid than AGOL, which has yet to fully catch on with investors.

Institutions may use either fund to establish long-term positions, but trading either fund actively is like throwing money away, considering the fact that GLD is one of the most liquid ETFs in existence, let alone one tracking physical gold.

AGOL vaults its gold in Singapore, one of the most trusted and transparent financial markets in the world. SGOL, on the other hand, vaults its gold in Zurich, one of the few countries still viewed as a “safe haven.” To that end, the value to investors is not just peace of mind, but transparency: The ETFs guarantee the location and segregation of your gold at all times.

The four funds appeal to different investors, and for a commodity strategy that holds a fully fungible, highly liquid commodity, that’s not necessarily an easy thing to accomplish.


At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com.

 

 

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