The Definitive Guide to Invest in Gold ETFs: Gold Bullion ETFs 101

by on October 29, 2009 | Updated September 19, 2013 | ETFs Mentioned:

The label “gold bug” may suggest a kooky old man who spends a lot of time in his basement reading conspiracy theory newsletters. The truth, however, is that there are many legitimate reasons to trade in gold and its derivatives. Gold has been proven time and time again to be an excellent “safe haven” investment, a holding that will appreciate in value during times of economic uncertainty. As such, gold may offer some valuable hedging and diversification benefits for a long-term portfolio. [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Gold ETFsFor this reason, gold is also an effective “dollar hedge” - it tends to rise as investors become uneasy with the idea of keeping their holdings tied up in the U.S. currency. In recent years, China has begun shifting its reserve holdings away from investments in U.S. Treasuries and towards hard currency (gold and silver). China has also encouraged its citizens to beef up their precious metals holdings, a sign that gold may play an increasingly important role in the future.

Five years ago, it was difficult for investors to efficiently invest in gold bullion. But the development of the ETF market has changed that. Gold ETNs and ETFs are an efficient way to invest in the metal without dealing with the associated “headaches” of holding a physical amount of gold in your possession. There are a number of exchange-traded products offering exposure to gold prices. But not all gold ETFs are created equal. Here’s a quick rundown of factors to consider when making an investment in a gold ETF [see also The Best Gold ETF…Isn’t An ETF].

How Gold ETFs (And ETNs) Work

Since gold is a commodity, many investors assume that gold ETFs are essentially identical. While there are a number of factors that make the various gold ETF products unique, the most important is the manner in which they achieve exposure to gold prices. Some gold ETFs buy and physically hold gold bullion (i.e., they have massive collections of gold bars), while others invest in futures contracts. Physically-backed gold ETFs will obviously track the spot price of gold more accurately, since the value of the underlying holdings depends solely on the market price of bullion [see also Does GLD Really Hold Gold, Or is it a Scam?].

ETFs that track gold prices using futures contracts will track the spot price of bullion very closely, but may deviate occasionally due to phenomenons such as backwardation and contango in commodity futures markets.

Ticker ETF Exposure Vault Location Expense Ratio
GLD SPDR Gold Trust Gold Bullion U.S. 0.40%
IAU iShares COMEX Gold Trust Gold Bullion U.S. 0.25%
SGOL Physical Swiss Gold Shares Gold Bullion Switzerland 0.39%
DGL PowerShares DB Gold Fund Gold Futures n/a 0.79%
AGOL Physical Asian Gold Shares Gold Bullion Singapore 0.39%
TBAR Gold Trendpilot ETN Gold Futures n/a 1.00%
UBG UBS E-TRACS CMCI Gold Total Return Gold Futures n/a 0.30%
  • GLD: The most popular ETF for gold exposure, GLD offers exposure to gold bullion its price represents roughly 1/10th an ounce of gold. As of the end of Q3 2012, GLD had approximately $75.5 billion in assets.
  • IAU: IAU also offers exposure to bullion, with its price representing 1/100th the price of an ounce of the precious metal. Note that its expense ratio makes it an enticing buy over GLD.
  • SGOL: This fund features a physically-backed strategy but holds its bullion in a vault in Switzerland for those who are wary of U.S. vaults.
  • DGL: This is the most popular futures-based gold ETF, as the fund is composed of futures contracts that are intended to reflect the performance of this commodity [see also GLD vs. DGL: Two Gold ETF Options].
  • AGOL: This fund has an identical strategy to SGOL, but simply holds its bullion in a vault in Singapore.
  • TBAR: A unique strategy, TBAR invests in either gold bullion or 3 month T bills depending on a historical moving average basis.
  • UBG: In order to help avoid contango, this fund invests in futures contracts that span in maturity from three months to three years.
  • FSG: Another one-of-a-kind methodology, FSG tracks the daily spread between gold and U.S. equity markets.

For investors with significant gold holdings, diversification across custodians and geographies may be desired as well. While a repeat of the U.S. gold confiscation of 1933 is unlikely, it isn’t completely impossible. Some investors may sleep better at night knowing their gold is securely stored in multiple locations in different parts of the world. For this reason, London-based ETF Securities offers an ETF that stores its gold in Switzerland, a country long known for being friendly to investors. “The feedback that we’ve received from investors is that they would like to be able to hold their gold in Switzerland for a number of different reasons including diversification of geography, vault, custodian and issuer,” said William Rhind, Head of Sales and Marketing for ETFS Marketing following the launch of SGOL [see also When Bigger Isn’t Better: Profiling ETF Alternatives To DJP, FXI, GLD].

Gold bugs will also see the benefits of diversifying their holdings across custodian. While the likelihood of any shenanigans involving gold holdings is incredibly remote, the lat two years have taught us to never count anything out. JP Morgan serves as the custodian for SGOL, while HSBC and the Bank of Nova Scotia serve as custodians for GLD and IAU.

For more information about ETF strategies for wealthy individuals, see our Free Guide to ETFs for Very High Net Worth Individuals.

Precious Metals ETFs

Aside from those that specifically focus their assets on gold, there are ETFs that offer a more broad exposure to those looking for a more diversified play.

Ticker ETF % Gold*
DBP PowerShares DB Precious Metals Fund 80%
JJP iPath Dow Jones-UBS Precious Metals ETN 79%
GLTR Physical Precious Metal Basket Shares 50%
RGRP Rogers Enhanced Precious Metals ETN 52%
GLTR Physical Precious Metal Basket Shares 76%
*As of 11/28/2012

“Indirect” Gold ETFs

For investors who are uneasy about investing directly in commodities (or futures contracts on commodities), there are ways to gain exposure to gold prices while sticking to equities. Mining and exploration companies can make for an enticing play on gold, as they maintain heavy ties to the metal, while still offering an equity ticker to invest in [see also These Aren’t Your Grandfather’s Gold ETFs].

Investors should note that these companies and related ETFs typically have high betas, making something of a leveraged play on the underlying metal. It should also be noted that the equity funds do not always trade in line with gold prices, as they have a very different set of price drivers that can sometimes have nothing to do with gold (i.e. rising fuel costs for transporting the commodity).

Ticker ETF Expense Ratio Inception Date
 GDX Market Vectors TR Gold Miners 0.53% 05/16/2006
GDXJ Market Vectors Junior Gold Miners ETF 0.56% 11/10/2009
 GGGG Pure Gold Miners ETF 0.59% 03/15/2011
 RING MSCI Global Gold Miners Fund 0.39% 01/31/2012
 GLDX Gold Explorers ETF 0.65% 11/04/2010
 PSAU Global Gold and Precious Metals Portfolio 0.75% 09/18/2008
 HAP Market Vectors Hard Assets Producers ETF 0.49% 08/29/2008
 GRES IQ Global Resources ETF 0.75% 10/27/2009
 EMT Dow Jones Emerging Markets Metals & Mining Titans Index Fund 0.85% 05/21/2009
 JUNR Junior Miners ETF 0.69% 03/16/2011
 REMX Market Vectors Rare Earth/Strategic Metals ETF 0.57% 10/28/2010
 XME SPDR S&P Metals and Mining ETF 0.35% 6/19/2006
 PICK MSCI Global Select Metals & Mining Producers Fund 0.39% 1/31/2012

Leveraged And Inverse Gold Exposure

The options for investing in gold through ETFs don’t stop with “plain vanilla” long funds. Speculators with strong opinions on short-term price movements of the “yellow metal” can utilize leveraged or inverse products to make a bet on the future of gold. Note that these funds can often be quite dangerous, so close monitoring and stop-loss orders are a must [see our GLD-Free Gold Bug ETFdb Portfolio].

Ticker ETF Inverse? Leverage Time Horizon
DGP PowerShares DB Gold Double Long ETN No 200% Monthly
DZZ PowerShares DB Gold Double Short ETN Yes -200% Monthly
UGL ProShares Ultra Gold No 200% Daily
GLL ProShares UltraShort Gold Yes -200% Daily
DGZ PowerShares DB Gold Short ETN Yes n/a Monthly
UGLD 3x Long Gold ETN No 300% Daily
DGLD 3x Inverse Gold ETN Yes -300% Daily

Gold ETPs And Taxes

Consider a hypothetical $10,000 investment in gold made at the beginning of 2009. Through the end of the first quarter of 2012, gold prices had jumped by about 90% over that 39-month period. But not all exchange-traded products that offer exposure to gold delivered equal returns; that initial investment in GLD would have grown to about $18,738 while futures-based gold ETPs would have grown to a smaller sum [see also Why No Investor Should Own GLD]:

Initial $10,000 Investment
GLD DGL UBG
$18,738 $17,978 $18,058

At first glance, GLD, which holds physical gold bullion, appears to be the best bet. That fund outperformed DGL and UBG, which achieve exposure to gold prices through futures contracts, by a relatively wide margin. But that value on your account statement doesn’t necessarily reflect the amount that investors get to keep or that can be converted to cash at any given time. The biggest consideration, of course, is as unavoidable as death; taxes.

GLD is taxed as if investors held the underlying gold themselves, meaning the collectibles rate of 28%. DGL, a commodities pool that holds futures contracts, is taxed at a blended rate between short-term and long-term capital gains that generally works out to about 23%. UBG, an exchange-traded note (ETN) doesn’t actually hold anything; it’s a debt security whose underlying value fluctuates based on the performance of a specified index. The ETN structure introduces credit risk to the equation–UBG is a debt of UBS–but it also brings some potentially advantageous tax treatments to the table. Specifically, positions in UBG held for longer than a year will be taxed at the long-term capital gains rate of 15% [see also GDX vs. GDXJ: A Better Way To Play Gold?].

So when we consider the amount of the gains in these gold ETPs that investors get to keep, the picture begins to look dramatically different:

Gold ETPs
GLD DGL UBG
Value $18,738 $17,978 $18,058
LTCG Rate 28% 23% 15%
Taxes ($5,247) ($4,135) ($2,709)
Net Value $$13,491 $13,843 $15,349

In this example, the favorable long term capital gains treatment more than offsets the performance lag for UBG; after considering Uncle Sam’s take in these hypothetical investments in gold ETPs, the ETN leaves investors with the most take home money at the end of the day

Further Reading on Gold ETFs

To stay up to date on all developments with various gold ETFs, sign up for our Free ETF Newsletter. If you’re interested in gold ETFs, here’s some more advanced reading:

Disclosure: No positions at time of writing.