The Merk Gold Trust, a bullion ETF currently in registration, is setting out to change part of the way ETFs work.
I’m referring to the creation and redemption of ETF shares that has historically been limited to a select few market makers known as authorized participants (APs).
APs, designated by the ETF issuer, are given the privilege of creating and redeeming large blocks of ETF shares in exchange for the fund’s underlying securities.
Those trades are out of the reach of retail investors though, because they typically require an amount of shares worth millions of dollars and the special AP designation.
But the prospectus filed with the Securities and Exchange Commission aims to extend the ability to redeem, though not create, ETF shares for gold to much smaller investors. According to the regulatory paperwork, investors will be able to redeem ETF shares for as little as a single ounce of gold.
So how will it work?
Expensive Nuts and Bolts
According to the prospectus, investors will be able, through a broker, to apply to redeem their shares for gold bullion. Those looking to redeem will have a choice in how they receive their gold: Merk Investments plans to offer a variety of bars and coins as redeemable assets.
To be clear, though, Merk isn’t making it cheap to redeem shares for gold, and they’re not making ETF arbitrage much of a possibility here either.
The fund plans to charge a hefty “exchange fee” for each redemption request.
The fee, calculated as a percentage of the value of the gold being redeemed, will range from 2.5 to 7.5 percent, depending on how investor wants their gold. Investors requesting American Eagle coins, for example, will pay more than those looking to take London bars.
Merk also sets a minimum fee of up to $7,000—again depending on the form of the gold—for each redemption request, meaning it won’t make financial sense to redeem very small quantities of gold such as a few ounces.
If the fund is approved by the SEC, it will be the first to open the doors of redeeming ETF shares to everyday investors.
That’s particularly newsworthy in gold ETFs, where some outspoken critics have questioned whether ETFs actually hold gold. The proposed Merk fund is, presumably, appealing to those doubters, aiming to win the assets of gold bugs worried that GLD shares will turn out to be worthless.
Even if it’s mostly a novelty, it’s nice to see an ETF firm open up its doors to redemptions from smaller investors, if only because it throws some light on a process so fundamental to how ETFs function.
Even better, the process clearly indicates the ETF will hold gold—hopefully finally silencing those who fear that ETF shares aren’t backed by actual assets.