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]
For 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:
- Free Report: Everything You Need To Know About Commodity ETFs
- The Ultimate Guide To Gold Investing
- 50 Ways To Invest In Gold
- Gold ETFs In Focus
Disclosure: No positions at time of writing.
