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Why No Investor Should Own The SPDR Gold ETF (GLD, IAU, SGOL, PHYS, SLV)

February 20th, 2012

Jared Cummans:  Those looking for a reason to add commodity exposure to their portfolio will find gold’s massive historical return to be heavily persuasive. This precious metal has quickly become one of the few safe haven investments left on the market as investors will typically flock to gold when equities falter. Some swear by futures contracts, while others are more partial to obtaining their gold positions by investing in the mining sector, which can offer offer lucrative opportunities as these securities often have high betas. Still, others have embraced exchange traded products as their primary means of establishing a position in this commodity [see also Three Reasons Why Gold Is Overvalued].

No ETF has been more instrumental to gold’s rise than the SPDR Gold Trust (NYSEArca:GLD), which just so happens to be the second largest ETF in the world by assets. With over $70 billion in AUM and an average daily volume topping 11.9 million, GLD has established itself as an investor favorite and as one of the most popular funds around. But the fund is not without its drawbacks and for those looking to establish long term exposure to gold, there is one fund that offers a more enticing investment thesis, the COMEX Gold Trust (NYSEArca:IAU) [see Why Warren Buffett Hates Gold].

The Gold Case

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First and foremost, this is not an article bashing GLD. This has nothing to do with some of the outlandish speculation that GLD actually holds no gold or any other conspiracy involving this ultra-popular ETF. Instead, this article is dedicated towards long term investors who are seeking to add gold exposure to their portfolio. It is also important to note that the article is specifically designated towards “buy and hold” investors, not traders.

If it seems like these two funds are near identical on the surface, its because they are. Both funds track physical gold bullion with GLD representing approximately 1/10th an ounce of gold while IAU represents about 1/100th an ounce of the precious metal. When it comes to liquidity, GLD takes the cake. The fund has a very active options market, almost eight times the assets of IAU, and a daily volume that is nearly double its smaller competitor. This makes GLD a prime trading instrument and it has certainly produced massive returns for a number of investors. But as it was stated earlier, this article focuses on long-term investors, where IAU has a clear edge [see also 12 High-Yielding Commodities For 2012].

After all is said and done, it all boils down to a few measly basis points; IAU charges 0.15% less than GLD, making it the ideal long term hold. Think that number sounds insignificant? Consider two different million dollar portfolios, one which is wholly invested in GLD and the other doing the same for IAU (obviously a diversification nightmare but stick with me). The GLD portfolio will incur annual expenses of $4,000, while its competitor will shell out only $2,500. That $1,500 difference seems miniscule for just one year, but drag it out over a 30 year investment and the difference between fees amounts to $45,000, or 4.5% of your original investment. Saving yourself a quick 4.5% could have been as simple as buying IAU over GLD.

Also consider that IAU’s cheaper fees will mean that it will generally outperform its competitor. Though the difference will be slight, there will be a noticeable delta between the two when the time frame is expanded to multiple decades. Note that GLD’s size and trading volume can tweak these numbers a bit, but evidence shows that assets may be headed towards IAU, which could erase this issue in time. IAU slashed its expense ratio in mid 2010, making 2011 its first full trading year at 0.25%. Last year, IAU saw cash inflows of over $2.7 billion, while GLD saw outflows of $372 million, suggesting that long term investors have begun to catch on to the money saving trend between these two ETFs [see also Seven Reasons To Hate Gold As An Investment].

Final Thoughts

As mentioned earlier, GLD is likely the supreme trading instrument for more active investors. The fund offers unmatched liquidity and a strong options market. But when it comes to long term investors, IAU emerges as a clear winner. With a wide range of individuals and analysts predicting gold’s rise to continue through out the years, a number of investors have added exposure to their retirement accounts or at least some kind of long term basket of holdings. For those who have adopted a gold strategy that will stretch over multiple years, consider the money that could be saved with IAU and the difference that a few seemingly insignificant basis points can make [see also The Ultimate Guide To Gold Investing].

Related ETFs: iShares Gold Trust (NYSEArca:IAU),  ETFS Physical Swiss Gold Shares (NYSEArca:SGOL), SPDR Gold Trust (NYSEArca:GLD), iShares Silver Trust (NYSEArca:SLV),  Sprott Physical Gold Trust (NYSEArca:PHYS).

Written By Jared Cummans From CommodityHQ  Disclosure: No positions at time of writing.

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


NYSE:GLD, NYSE:IAU, NYSE:PHYS, NYSE:SGOL


 

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  1. Credibility?
    February 27th, 2012 at 13:55 | #1

    “Instead, this article is dedicated towards long term investors who are seeking to add gold exposure to their portfolio.”

    Why No Investor Should Own The SPDR Gold ETF

    Which is it, then?

  2. February 25th, 2012 at 14:05 | #2

    Good article! I like the liquidity of GLD and SLV but I remember from somewhere that the Trustees of these funds are large bankers—firms like JPMorganChase. If gold is ever confiscated by our government, a la 1933, the banks “too large to fail” would quickly amass huge consumer net worth for pennies on the dollar. Physical gold is nice because it can be hidden in mattresses, etc. Germans have stated to me that they wish they had held onto their gold in the 1930′s instead of pledging it to the Reichsbank.

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