The Pros And Cons Of Gold Miner ETFs

August 13, 2012


Gold Miners Vs. Physically Held

The correlation between the total return of gold equity funds and gold spot prices is lower than expected as well. Over the past two years, correlation between the total returns of GDX, GDXJ and PSAU and the spot price of gold has averaged 0.74, 0.74 and 0.69, respectively.

Unsurprisingly, physically held ETFs such as the SPDR Gold Shares (NYSEArca: GLD), the iShares Gold Trust (NYSEArca: IAU) and the ETFS Physical Swiss Gold ETF (NYSEArca: SGOL) have had a correlation of 0.99 over the same time period.

The return chart below shows returns over the past two years. Once again, equity-based funds are a poor substitute to their physically held counterparts when it comes to matching returns on gold spot prices.


SGOL vs GOLD vs PSAU vs IAU vs GDXs vs GLD vs GDXJ

Source: Bloomberg

The returns for equity funds that are two years or older—GDX, GDXJ and PSAU—are much different than those of the physically backed funds GLD, IAU and SGOL. Although gold has had an overall positive performance over the past two years, gold miner ETFs saw a negative total return.

In fact, the returns of the physically held funds SGOL, IAU and GLD overlap with the gold spot price so closely that it’s hard to distinguish them in the chart.

Gold miner ETFs are also more expensive to hold. On average, they have annual management fees of 0.57 percent, compared with their physically held counterparts, which charge an average of 36 basis points.

Admittedly, physically held funds are not known for their tax efficiency, since they don’t qualify for the 15 percent long-term tax rate that applies to traditional equity investments. Instead, the Internal Revenue Service taxes long-term profits of physically held precious metals funds at a rate of 28 percent, while short-term investments—those held for one year or less—are taxed as ordinary income at a maximum rate of 35 percent.

Investors can mull the pros and cons of equity-based gold ETFs on their own time. But they must understand that buying equity funds provides exposure to mining companies and not to gold spot prices.


At the time the article was written, the author had no positions in the securities mentioned. Contact Ana Kostioukova at [email protected]. Follow Ana on Twitter @AnaKostioukova.


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