Redeemable Gold ETFs Could Be Costly

March 28, 2013

The costs of converting shares for physical gold in the Merk- and Van Eck-planned ETFs could prove to be prohibitive for small investors.


Two gold ETFs that would allow investors to redeem shares for physical gold, currently sitting in the regulatory pipeline, promise to bring a shares-for-gold convertibility similar to that found in the SPDR Gold Shares (NYSEArca: GLD) to investors of any size. But it remains to be seen just how cost-competitive these strategies will be.

Indeed, both the Market Vectors Redeemable Gold Trust and the Merk Gold Trust aim to provide investors—any investors—an opportunity to invest in securitized gold while being able to take delivery of gold bullion in exchange for their shares.

GLD, by comparison—the market’s biggest gold trust and second-largest ETF in the world today—already offers that access to gold, but limits that redeem-for-bullion feature to amounts of 100,000 shares or more—a restriction Merk and Van Eck’s Market Vectors are looking to remove. GLD’s expense ratio is  0.40 percent.

The idea certainly has its allure, and is said to cater to growing investor demand for access to physical gold at a time of an improving, but still-uncertain, economic environment both here and abroad. Gold has long been seen as the safe-haven asset of choice for many investors who lack confidence in the economy or in currencies in times of economic trouble.

Axel Merk himself, the mastermind behind the gold trust strategy he first put in registration a year ago, has said before that he wholeheartedly believes in the investor demand for such an ETF. If GLD’s $65 billion in assets under management are any indication, the market’s appetite for access to securitized physical gold through an ETF is enormous, no doubt.

But while there’s no questioning that the marketing hook is a good one, it remains to be seen just how feasible—from a cost and logistics perspective—the strategies Merk and now Market Vectors propose will prove to be. Neither registration statement for either fund has yet provided details on that cost structure, and neither company can comment on filings.


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