You're Long In The Wrong Physically Backed Gold ETF
Summary
- Physically backed gold ETFs all are backed by the same thing, yet they don't trade in lockstep.
- Each ETF has its own perks and drawbacks from liquidity, to expense ratio, to vault location.
- Additionally, we list the authorized participants for each ETF to further examine the underlying liquidity for each ETF.
- We've even included a tax tip at the end for those long a physically backed gold ETF.
Background
There are four different physically backed gold ETFs out there. This drove us to do a side-by-side comparison to help investors determine whether or not they are using the best ETF for their needs.
While there is one main thing in common with these funds, it is the differences that are often overlooked. The moral of the story is that one physically backed gold ETF is not the same as another. The four ETFs in order of AUM are as follows:
- SPDR Gold Trust ETF (GLD)
- iShares Gold Trust ETF (IAU)
- ETFS Physical Swiss Gold Trust ETF (SGOL)
- Van Eck Merk Gold ETF (OUNZ)
data by YCharts
All four ETFs are Grantor Trusts that hold physical gold and seek to track the performance of spot gold. However, as shown above, they have all had slightly different performances on a year to date basis. There are some other minor differences that give each ETF perks and drawbacks.
Side-By-Side
| GLD | IAU | SGOL | OUNZ | |
Price Close 1/20/16: | $105.37 | $10.64 | $107.44 | $10.93 |
AUM: | 22.97 B | $5.64 B | $779.47 M | 79.56 M |
Expense Ratio: | 0.40% | 0.25% | 0.39% | 0.40% |
Average $ Volume: | $609.67 M | $85.78 M | $3.35 M | $348.99 K |
Average Spread: | 0.01% | 0.10% | 0.05% | 0.09% |
Launch Date: | 11/12/2004 | 01/21/2005 | 09/09/2009 | 05/16/2014 |
Gold Location: | London | London, New York, Toronto | Zurich | London |
Lowest Expense Ratio
For investors with a longer-term investment horizon, the high expense ratios of GLD and OUNZ both at 0.40% and SGOL at 0.39% of AUM annually can really eat into potential gains. Those investors should be considering IAU as a means of gaining physical exposure to gold with an expense ratio of only 0.25%.
Lowest Bid-Ask Spread
For investors who change their mind on investments often, or just happen to be active traders when it comes to physically backed gold ETFs, GLD is by far the winner with a 60-day average spread of 0.01%. Close behind is SGOL with an average spread of 0.05% which has the added benefit of trading commission free through Charles Schwab (SCHW) for traders who are really looking to cut costs with regards to their gold position.
Highest Volume
GLD, once again is unmatched in this category of liquidity measurement. With a 45-day average $ volume of over $609 million, IAU is not even a close second with just over $85 million. For investors and traders who will be moving in/out of this position with significant size, GLD is the ETF that can provide the liquidity necessary. Below is a chart comparing the ETFs' average volumes in terms of shares rather than $ above.
data by YCharts
Authorized Participants
We wanted to go one step further when determining which ETF was most liquid by comparing the final determinant of secondary market liquidity. That final determinant is the creation/redemption process for the funds, which is the process through which the shares keep lockstep with the underlying assets ((gold)). Not surprisingly the fund with the most is the one that holds COMEX deliverable bars unlike others that also hold coins such as OUNZ.
| ETF | Authorized Participants |
| IAU | Virtu Financial, Inc. (VIRT), Credit Suisse Group AG (CS), HSBC Holdings PLC (HSBC), Goldman Sachs (GS), JPMorgan Chase (JPM, Bank of America (BAC), Morgan Stanley (MS), Bank of Nova Scotia (BNS), UBS Group AG (UBS), Deutsche Bank AG (DB), Societe Generale (OTCPK:SCGLY), Barclays PLC (BCS), Citigroup Inc. (C), KCG Holdings, Inc. (KCG) |
| SGO | VIRT, CS, HSBC, GS, JPM, BAC, MS, BNS, UBS, DB, SCGLY |
| GLD | VIRT, CS, HSBC, GS, JPM, BAC, MS, BNS, UBS, Royal Bank of Canada (RY) |
| OUN | VIRT, CS |
Geographic Differences
GLD and OUNZ both hold the gold in vaults in London, while SGOL chooses Zurich as its location of choice. IAU on the other hand uses COMEX approved vaults all over the globe. Gold in Swiss vaults can fetch a premium to gold held in vaults in London or elsewhere for a few reasons. First, Swiss law has always been known to protect the owner and their assets. Second, many Swiss vaults will melt "Good Delivery" bars into smaller sized bars in high demand in Asian markets.
Additionally, for those who invest in physical gold to protect against collapse of the worldwide fiat currency system (worst case scenario), gold held in U.S. vaults is what to avoid especially. This is due to Executive Order #6102 signed in 1933 by FDR that confiscated gold of certain kinds, punishable by fines, imprisonment, "or both."
Launch Date
We also wanted to note the correlation between launch date and AUM. It proves that despite GLD having the runaway highest AUM out of the four at nearly $23 Billion, it is vulnerable to competition. As other competing ETFs come to the market, lower fees can certainly draw assets from investors.
Share Price
Last but not least, we wanted to mention share price because this comes into consideration for smaller traders/investors with limited capital trying to buy in round lots. When it comes to share price, smaller traders can look towards IAU and OUNZ which both currently trade under $11.
Conclusion
We hope this was a useful and comprehensive guide to investing in the physically backed gold ETFs. We look forward to keeping investors informed on any new developments as we see them. As promised, our tax tip is below.
(TAX TIP)
For investors who find themselves hit by the falling gold prices the past few years or happen to find themselves in a gold ETF with too high an expense ratio, be sure to note: The IRS wash sale rule prevents writing off losses on a position that you sell at a loss then repurchase within 30 days. However, if you retake the same sized gold position with a different ETF, this rule does not apply.
References
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (19)
CEF holds both physical gold as well as physical silver, while those compared above are all pure-play physical gold. However, we will look at CEF for inspiration for future research. Thanks!
Don't believe me, than read THIS: and THIS:
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Perhaps a little sensationalized, but Jim Willie recently commented:The Gold market cannot be fixed by paper gold on a repeated basis, surely not in perpuity. When the Shanghai shock comes, all the Paper Gold structures will fall, all the FOREX derivatives will collapse, all the control rooms will go into panic mode.
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An acute shortage of readily marketable physical gold is developing that we believe will deepen in years to come. This possibility seems to be unrecognized by those who are short the gold market through paper contracts. The relentless dumping of synthetic or paper gold contracts since 2011 by speculators in Western financial markets has caused the shortage. The steady selling has driven down the price of physical gold, hobbled the gold-mining industry, and drained the stores of gold held in the vaults of Western financial centers. We believe that the shortage will worsen because (1) the precursors of production (exploration, discovery, reserve life) are very negative, (2) the mining industry has little financial credibility and seems unlikely to attract capital even with a big rise in gold prices, and (3) refining capacity limitations tend to create supply bottlenecks when physical demand spikes.
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