Gold ETF Returns Show Huge Disparity

April 19, 2013

In the recent gold plunge, not all ETFs are equal.


Amidst the recent plunge in gold prices, ETFs have shown a huge disparity in performance—some gold ETFs have declined as much as 20 percent, while others have escaped nearly unscathed.

The differences in performance can be attributed to the method through which each fund gains exposure to gold. That exposure can be broadly grouped into three categories: gold miner equities; futures-based strategies; and physical funds.

Gold miners are one way to gain exposure to gold-linked equities; these ETFs invest in the common stock of gold mining companies. In theory, this is a legitimate way to gain exposure to gold; after all, if the miners control new supply on the market, then they ought to be able to leverage increases in gold prices which, in turn, ought to boost their bottom line.

The problem with gold miners, however, was best presented by hedge fund titan John Burbank as an analogy: Investing in gold miners is like using a winning lottery ticket to buy more lottery tickets.

The analogy isn’t perfect but the point is clear: In the long run, the share price of equity miners will not keep pace with increases in the price of gold.

Investors can also choose to get gold exposure through futures-based gold ETFs, which are portfolios that buy futures contracts on gold. By purchasing a futures-based gold ETF, you own a portion of the right to buy gold in the future at a predetermined price.

These ETFs systematically roll from one futures contract into another as the contract approaches maturity. Contract selection methods vary from fund to fund, but the essence is the same.

The argument for futures-based strategies is primarily one of cost: Physically backed ETFs—which I’ll turn to momentarily—incur the costs of storing, protecting and counting gold. As you can imagine, those costs aren’t menial, but whether or not futures strategies are actually more cost-effective than physically backed portfolios is debatable.

The last category of gold ETFs includes funds that buy and store physical gold. This option appeals to many investors because of its simplicity and security.

One of the most popular reasons people choose to invest in gold is as a hedge against some form of a global economic collapse. In that sense, many seem to feel reassured that if the world comes crumbling down, they at least have gold stored in vaults in London, New York or Singapore.

Now, these different approaches certainly fared very differently in the recent gold downturn, as the table below shows.

Gold Return Breakdown


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