What Is A Gold ETF? Some Investor Confusion Still Exists (GLD, IAU, SGOL, AGOL)
Christian Magoon: What is a gold ETF? is a question I get all the time. Interest in gold ETF products has blossomed along with performance but the name “gold ETF” is not very friendly. In short, the answer to “What is a gold ETF?”is this: an exchange – traded fund (ETF) that holds bars of gold in order to achieve an investment objective of tracking the price of gold, less fees and expenses. If that explanation is satisfactory then please stop reading this article right now. For those who want more detail on other types of gold ETFs, how gold ETFs work and the list of U.S. listed “gold ETFs,” read on.
What Is A Gold ETF: Some Confusion Exists
Many call two completely different types of ETFs “gold ETFs.” This term is often used generically and can be confusing for many. The first type of “gold ETF” outlined above fits the definition in the strictest sense. These “gold ETFs” literally own and track the price of gold.
However many also include ETFs that own gold mining or exploration stocks in the “gold ETF” category. To be clear, these ETFs seek to track the price of a basket of stocks involved in the business of mining or exploring for gold, less fees and expenses. These companies do have a relationship to the price of gold, however it varies and even can become disconnected at times.
From my perspective there are really two types of “gold ETFs.” Physical gold ETFs, which track the price of gold, and gold stock ETFs which track a basket of gold related companies. In my experience however, the average investor usually means physical gold ETFs when they talk about “gold ETFs” thus we will continue to focus our examination on products that seek to track the price of gold through the physical ownership of gold.
What Is A Gold ETF: Here’s How It Works
There are currently four gold ETFs listed in the United States that seek to track the price of gold, less fees and expenses, by physically holding the precious metal. They do this by actually storing gold bars in a vault which is regularly audited by third party inspection agencies. The ETFs then issue shares that are backed by the gold bars. These ETF shares then trade on major stock exchanges like the NYSE or the NASDAQ. Here’s the gold ETF chart with names and ticker symbols from GoldETFs.biz.
Two Key Differences To Understand
Two main differences in the four gold ETFs listed above are expense ratio and the location of gold storage. First expense ratios range from 25bps to 40bps. Unlike many people assume, the largest gold ETF in assets also has the highest expense ratio – SPDR Gold Trust (NYSEARCA:GLD). The second largest gold ETF (NYSEARCA:IAU), happens to have the lowest expense ratio. Go figure.
The location of where the gold is stored is another difference to be aware of when considering gold ETFs. Three gold ETFs store their gold in a single location: GLD in London, (NYSEARCA:SGOL) in Zurich and (NYSEARCA:AGOL) in Singapore. IAU differs by storing gold in three cities: London, Toronto and New York. For some investors, location can be a deciding factor based off their personal location or world view.
What is a gold ETF? is a great question and the answer is expanding each year. But for today, a gold ETF is simply an exchange – traded fund that holds physical gold with an investment objective of tracking the price of gold, less fees and expenses.
Christian Magoon is Publisher of GoldETFs.biz and IndiaETFs.com. He is also CEO of Magoon Capital, a strategic consultant firm to asset managers. Christian Magoon is an ETF insider, having launched over 40 ETFs in the United States to date. A widely recognized thought leader on finance and market issues, Christian regularly contributes to many financial media outlets. Prior to forming Magoon Capital in 2010, Christian was President of Claymore Securities (now Guggenheim Investments), where he built one of the fastest growing and most innovative ETF businesses in the country, gathering more than $3 billion in AUM in three years. He launched more than 40 ETFs, introducing many “firsts” to the U.S. market, including the first Frontier Markets, Sector Rotation, Solar Energy, Timber, BRIC and suite of China focused ETFs. Christian consistently provides his industry insights and knowledge as a commentator in the U.S. media speaking publicly on macro investment issues and ETF related topics. Follow him on Twitter@ChristianMagoon. In 2008, he was named by Institutional Investor News as one of the five people to watch in the U.S. ETF marketplace. In 2011, Financial Planning magazine dubbed Christian an “ETF Pioneer.”