The Difference 15 Basis Points Make

February 22, 2011

When it comes to physically backed products, expenses can really add up.

Last week, I mentioned a curious fact gleaned from the most recent slew of 13-F filings: Billionaire investor and avowed gold aficionado George Soros increased his holdings of the SPDR Gold Trust (NYSE Arca: GLD) last quarter by 0.5%.

I was – and remain – unimpressed with his choice. Although I glossed over my reasons at the time, I thought it might warrant further explanation.

With more than $52 billion in assets under management, GLD is the clear behemoth of gold investments. It’s highly liquid and offers low spreads, and day to day, it tracks the price of gold pretty darn well.

But as a long-term buy-and-hold investment, it stinks.

Running a full analysis on the long-term monetary benefit of holding bullion vs. GLD is beyond the scope of this article (for a number-by-number comparison, I encourage readers to check out Julian Murdoch’s excellent analysis, “Is GLD A Good Deal?”). Suffice to say the numbers show that the longer you hold your gold allocation, the more money you save holding it in physical – not ETF – form.

Which is why I can’t understand why a smart guy like Soros doesn’t convert over to physical bullion like David Einhorn did back in 2009. Clearly he’s just sitting on his gold allocation – why not save a little money besides?

Maybe Soros likes the flexibility that an ETF vehicle offers, and I won’t argue with that. But if he is dead-set on holding only exchange-traded gold, then he could still be saving a boatload of cash.

Soros holds more than $738 million in exchange-traded vehicles, but his allocation to physical gold ETFs make up more than 98 percent of that value. (He also holds $885,000 worth of the Market Vectors Gold Miners ETF, GDX).

The GLD/IAU proportion breaks down as follows:

Name Ticker Shares Share Value
iShares Gold Trust IAU 5,000,000 $69,500,000
SPDR Gold GLD 4, 721,808 $655,009,000

Source: SEC

Soros may hold more shares of IAU, but valuewise, his GLD holding soaks up more of his portfolio value (since GLD shares currently cost roughly 10 times those of IAU). The two funds, however, are essentially the same: Both are highly liquid, secure physically backed ETFs. The main difference is 15 basis points: GLD’s expense ratio is 40 basis points a year, while IAU’s is only 25.

Run the math, and you’ll see that not only does Soros pay more in expenses on his gold funds than most of us make in a year, but he spends most of it on the higher-cost GLD:

Name Ticker Shares Value Expense Ratio Annual Expense
iShares Gold Trust IAU 5,000,000 $69,500,000 0.25% $173,750.00
SPDR Gold GLD 4,721,808 $655,009,000 0.40% $2,620,036.00
$724,509,000 $2,793,786.00

If he converted the remaining 4,721,808 GLD shares over to IAU, he’d save almost $1 million in annual expenses:

Name Ticker Shares Value Expense Ratio Annual Expense
iShares Gold Trust IAU 9,721,808 $724,509,000 0.25% $1,811,272.50
Difference $982,513.50

For many of us, that alone would be a pretty compelling reason to switch. Granted, Soros may have good reasons for sticking with GLD over IAU. But cost alone can’t be one of them.

The takeaway here is clear: Even when it comes to physically backed ETFs, expenses can add up over time and make a real, tangible difference in your overall returns.

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