Toronto-based Sprott Asset Management, a newcomer to the U.S. ETF industry, became the latest issuer to introduce a physically-backed gold ETF last week, debuting the Sprott Physical Gold Trust (PHYS) on Friday. The new fund “was created to invest and hold substantially all of its assets in physical gold bullion” and will compete directly with several existing physically-backed gold bullion funds.
While PHYS will be similar to existing gold ETF products, there are a few key differences. PHYS will store the underlying gold bullion at the Royal Canadian Mint, a Canadian Crown corporation that acts as an agent of the Canadian government whose obligations generally constitute unconditional obligations of the Canadian Government. With the launch of PHYS, investors now have the ability to invest in gold bullion stored in a number of physical locations, including the U.S., Canada, UK, and Switzerland (it should be noted that the iShares gold ETF stores gold in multiple locations, including Toronto).
A closer look at the prospectus reveals one unique and potentially exciting feature: any gains realized on the sale of units by an investor may be taxable at long-term capital gains rates (i.e., 15%), “compared to a long-term capital gains tax rate of 28% applicable to the disposition of physical gold bullion and other “collectibles” held for more than one year.” Under current U.S. law, the gains recognized from the sale of “collectibles” (a category into which gold ETFs fall for tax purposes) held for more than one year are taxed at a maximum rate of 28%, rather than the 15% rate applicable to most other long-term capital gains (it should be noted that the availability of the favorable tax treatment on PHYS is a complex issue that likely requires advice from a tax professional).
| Physically Backed Gold ETFs | ||
|---|---|---|
| Ticker | Vault Location | Expense Ratio |
| GLD | London | 0.40% |
| IAU | London/New York/Toronto | 0.40% |
| SGOL | Switzerland | 0.39% |
| PHYS | Canada | 0.65% |
PHYS was originally issued at a price of $10 per share, meaning that each share represents approximately 1/100th of a troy ounce of physical gold bullion. Most other physically-backed products represent 1/10th of an ounce per share, meaning that current prices are closer to $100 per share.
PHYS will cap total expenses at 0.65%, making it more expensive than its primary competitors. Despite the relatively expensive cost structure, PHYS turned in one of the more impressive opening days in recent memory for a new ETF: trading volume on Friday topped 4 million shares.
See this guide to gold ETFs for a more in-depth look at options for achieving exposure to the precious metal.
Disclosure: No positions at time of writing.
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