Beyond GLD: Four Alternative Gold ETFs

by on November 13, 2009 | Updated December 9, 2009 | ETFs Mentioned:

When gold bullion cracked the psychologically-important $1,000 per ounce mark earlier this year, most investors expected prices to pause around that level, or perhaps retreat slightly. But gold has continued higher, taking on a near vertical trajectory in recent weeks. Gold traded near $1,125 on Thursday, after setting all-time records in consecutive days earlier in the week.

Options For Gold Investing Go Beyond GLDGold first cracked the $1,000 mark in the spring of 2008, shortly after the collapse of Bear Stearns, when investors were anxious (with good reason) about the stability of the financial system. Now that these fears have now been put (partially) to rest, there is a new set of drivers behind skyrocketing gold prices. Low interest rates relative to the rest of the developed and emerging world have made the dollar an unattractive safe haven, and many major holders of U.S. debt have begun diversifying their reserve holdings into hard currencies. China has been accumulating gold for several months now (while encouraging its citizens to do the same), and India recently bought about $7 billion of gold from the International Monetary Fund. ETFdb Pro members can read more about drivers of gold prices in our ETFdb Category Report (if you’re not a Pro member yet, you can sign up for a free trial or read more here).

Given the current environment, some analysts are now anticipating gold prices rising to $1,500 before the end of the year, while others are even more bullish on prices in the intermediate term. The rise of the ETF industry has facilitated investment in gold, and both gold bugs and speculators have embraced gold ETFs in their portfolios. By far the most popular gold ETF is the SPDR Gold Trust (GLD), which has seen cash inflows for 2009 of more than $12.5 billion (through October) and now has total assets of nearly $40 billion. But GLD isn’t the only way for ETF investors to gain exposure to gold prices. Below we highlight four lesser-known ETFs that offer investors various degrees of exposure to gold prices.

PowerShares DB Gold Fund (DGL)

While GLD buys and stores gold bars in secure vaults, DGL tracks a rules-based index composed of futures contracts on gold. Many futures-based exchange-traded products simply roll over their holdings to the next month futures contracts as the expiration date nears, resulting in a roll yield if the futures markets are in a state of contango (which can be significant in certain environments). The index underlying DGL, however, is an Optimum Yield benchmark maintained by Deutsche Bank, which according to its prospectus means that it is “rolled in a manner which is aimed at potentially maximizing the roll benefits in backwardated markets and minimizing the losses from rolling in contangoed markets.”

Futures-based strategies offer another potential benefit: interest is earned on the underlying assets, partially offsetting management fees or potentially adding to return (although at present, the 3-month T-Bill rate – the relevant rate for DGL – is near zero). As of November 12,  DGL and GLD have provided similar year-to-date returns: GLD is up almost 26% while DGL has gained about 24%.

ETFS Physical Swiss Gold Shares (SGOL)

This ETF is similar to GLD in many respects, but differentiates itself in a few key areas. Like GLD (and unlike DGL), SGOL physically buys and holds bars of gold. But unlike GLD, this fund stores its bullion in secure vaults in Switzerland, offering geographic diversification for investors concerned about the security of storing their gold in the U.S.

In 1933, President Roosevelt issued an executive order requiring all U.S. citizens to deliver any gold bullion to the Federal Reserve. Since that time, ownership of bullion ha obviously become legal once again, but some investors believe a repeat is possible. Under current federal law, gold bullion can be confiscated by the federal government in times of “national crisis,” the exact definition of which is open to interpretation.

The probability of a confiscation of gold in the U.S. is extremely unlikely. But the last two years have introduced the term “black swan event” to investors’ vocabularies, and many are now cognizant of the potential impact of extreme events, however unlikely, on their portfolio.

Market Vectors Gold Miners ETF (GDX)

For investors hesitant to make an allocation to commodities, GDX offers a way to achieve indirect exposure to gold prices to gold prices through investments in the stocks of gold miners. This ETF has a global focus, including equities of miners in Canada, the U.S., South Africa, and Australia, among others. In recent months, GDX has served as an effective leveraged play on gold, generally delivering daily returns of two to three times the change in bullion prices.

GLD vs. GDX vs. DGL

While gold prices generally have a significant impact on the stocks of gold miners, there are obviously several other factors impacting these firms as well.

Market Vectors Junior Gold Miners ETF (GDXJ)

Earlier this week, Van Eck introduced GDXJ, an ETF focusing on small-cap companies that generate at least 50% of their revenues from gold and silver mining or hold real property that has the potential to produce at least 50% of the company’s revenue from gold and silver mining when developed.

Despite the similarity in names, GDXJ offers a very different risk / return profile compared to GDX. The Junior Miners ETF invests exclusively in companies with a market capitalization of less than $5 billion, while almost all of GDXJ consists of large cap firms. Many of these small cap gold miners are similar to venture capital companies that have yet to generate significant revenues and have negative cash flows.

Disclosure: No positions at time of writing.