Gold ETF Fee War Gets Complicated

April 26, 2019

Gold-Per-Share Ratio Matters
The answer boils down to a nuance that many investors less familiar with gold might overlook: gold-per-share ratio.

GLDM is essentially a modified version of GLD: Its vaulting and custody arrangements remain the same, but whereas each share of GLD represents 1/10th of an ounce of gold metal, each share of GLDM represents 1/100th of an ounce (the same as IAU).

That smaller gold-per-share ratio especially appeals to retail investors, who generally seek to place smaller trades to fulfill a buy-and-hold asset allocation strategy. A smaller gold-per-share ratio brings down the ETF’s share price, making it possible for investors with smaller asset bases to allocate meaningfully to gold.

As a result, smaller gold-per-share ETFs often see wider distribution in robo platforms or in ETF portfolio models by strategists, who don’t necessarily want to switch between products depending on their clients’ existing asset base.

“Advisors need to cater to millennial clients who may only have $2,000 to invest, as well as to their parents, who might have $2 million,” said Matt Bartolini, head of SPDR Americas Research. “They just want to have one product, one model open to everybody.”

Larger Share Price Benefits Traders
While a smaller gold-per-share ratio benefits buy-and-hold investors, it does little for short-term or tactical traders, who prize liquidity over low expense ratios.

“The more active a trader you are, the larger a [gold-per-share ratio] you want to see,” said Greg Collett, director of investment products for the World Gold Council. “That’s because the more shares you have to buy for the same amount of money, the higher your trading costs become.”

Most traders likely won’t be swapping en masse from GLD, which trades with pennywide spreads and minimal premiums and discounts.

But BAR—which has the same gold-per-share ratio as GLD, but at half the cost—has been able to lure at least a few traders, given its inflows of $445 million over the past 12 months.

“A lot of our clients are entrepreneurs and business owners. They run their own practice,” said Will Rhind, CEO and founder of GraniteShares, and formerly of the World Gold Council and ETF Securities. “For them, price is important; but the insight from our team’s experience and the relationship they can have with us matters too.”

Liquidity = Versatility
For the most frequent traders, BAR is additionally attractive, because it offers a lower spread (0.06%) than GLDM, which has a spread of 0.08%.

BAR also possesses a much lower creation unit size of 10,000 shares versus GLDM’s 100,000 shares, meaning it’s easier to create bulk trades in discrete sizes.

That may also be part of the reason BAR has amassed assets at SGOL’s expense, as the two ETFs have the same gold-per-share ratio as GLD, but new shares of SGOL can only be created in blocks of 50,000 shares or more.

At this point, we’ll probably never see GLD dethroned from its position as the king trading vehicle for gold investors. But so long as low-cost competitors can devise a better mousetrap, we’ll continue to see them chip away at GLD’s dominance. Over the past 12 months, for example, GLD saw outflows of $2.7 billion. Meanwhile, all other gold ETFs combined saw net inflows of $2.3 billion.


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