Stoyan Bojinov: The Gold SPDR (NYSE:GLD) is the 800 pound gorilla in the gold ETF space; this fund has become one of the largest exchange-traded products in the world, and one of the largest holders of physical bullion (GLD’s holdings dwarf reserves of some countries). This behemoth of a fund is physically-backed, a characteristic that likely has tremendous appeal to many investors, since it avoids some of the risks and nuances associated with futures-based products. Because the underlying assets are gold bars stored in secure vaults in multiple locations, the value of GLD can be expected exhibit a near-perfect correlation to spot gold prices. That means that a position in GLD replicates the experience of holding physical gold, but without the security risks or hassles that accompany a direct position in the precious metal.
It is relatively easy to understand the popularity of GLD, as the unrivaled liquidity offered in this fund–it trades an average of about 25 million share per day–makes it perhaps the simplest and easiest way to achieve exposure to gold bullion. But for investors who are in the market for precious metals exposure, there are other options out there–including a product that we believe is virtually guaranteed to outperform GLD over the long run.
GLD has a number of advantages over comparable products offering exposure to the yellow metal. This fund is the biggest in the gold ETF space, and it also falls towards the cheaper end of the expense spectrum, making it an appealing options for both long-term investors and active traders alike. Also, one share of this fund corresponds to roughly 1/10th the price of gold per ounce, a seemingly minor detail that may potentially influence investor’s decisions when comparing this fund versus (NYSE:IAU), which tracks 1/100th the price of gold per ounce. That’s because the costs incurred when trading will be dampened by the size of GLD. A penny-wide spread in GLD amounts to a much smaller percentage of value than a similar gap in IAU. For investors considering a big position in a gold ETF, the difference between the allocation offered per share can potentially translate into a meaningful cost differential when moving into or out of a position.
Another advantage of GLD is the incredibly active options market, making this ETF an ideal choice for investors looking to implement any number of hedging strategies to complement their existing long/short position. While options are available on some other gold ETFs, the depth of the market is not nearly on par with GLD. For any investors hoping to combine a position in this ETF with an options-based strategy, GLD is probably the best choice out there.
The biggest knock on GLD is pretty straightforward: compared to other options out there, the fund is pretty darn expensive. Although this ETF is by no means expensive–0.40% for gold exposure is a bargain–there are cheaper ETF alternatives. IAU easily takes the prize for cheapest gold ETF, charging a mere 0.25% and beating out GLD by 15 basis points from an expenses perspective. (NYSE:SGOL) and (NYSE:AGOL) are also cheaper than the Gold SPDR, though those differences are less severe. Although this difference in expenses is minor, buy-and-hold investors interested in minimizing total portfolio costs over the long run should consider IAU over GLD. That’s especially true because these two products are essentially identical except for the fees; the underlying asset is literally a commodity, meaning that these products are nearly identical.
Because GLD is physically-backed, this ETF is subject to some unfavorable tax rules since the IRS considers gold bullion a collectible. Long-term gains in GLD will be taxed at 28% instead of the usual capital gains rate of 15% (though all other physical gold ETFs suffer from that same drawback). Another minor drawback of GLD is that the fund sometimes holds minimal amounts of cash and does not always allocate exactly 100% of total assets to gold bullion.
Does GLD = SCAM?
The short answer: no. Some investors have expressed concern over the efficiency of GLD, as a number of web sites have popped up to suggest that physically-backed gold ETFs are scams that don’t hold nearly the amount of gold that they claim. These conspiracy theories are perhaps entertaining, but at the end of the day there is very little to them; the holdings of GLD are actually well documented, and investors have nothing to worry about.
CNBC recently ran a segment that sent one of its anchors inside the GLD vault, and the physical bars of gold bullion are regularly audited by an independent firm. The reality of the physical gold in London hasn’t silenced the wild theories concerning the whereabouts of GLD assets, but reasonable investors should have no issue with investing in GLD.
The holdings of GLD and other gold ETFs are regularly audited by independent third parties, and the inventories taken should be all the validation that most rational investors need to feel comfortable allocating some of their hard earned cash to these funds.
There are a number of alternatives to GLD, including one option that we believe is a better choice for the vast majority of investors out there. As mentioned previously, the cost differential between GLD and IAU is significant, and the homogeneity of the underlying assets means that GLD is essentially guaranteed to underperform relative to IAU over just about any time period. For investors with relatively small positions looking to establish a position for the long term, IAU makes much more sense: that fund will deliver better returns in any type of environment.
For those seeking physical gold exposure through an ETF, there are a couple of other choices besides IAU. SGOL offers exposure to gold stored in Switzerland, while the bars owned by AGOL are located in Singapore. For conspiracy theorists worried about any risks in storing gold in New York or London, these funds might be appealing. Those risks are, of course, minimal, but we recognize that some investors might sleep a bit easier knowing that their gold is stored securely in a remote location.
It should be noted that GLD might make sense for some investors. The differences in per share value might actually make GLD cheaper for certain large investors, and the aforementioned liquidity of the related options market will certainly have appeal to investors implementing more sophisticated strategies.
Overall, GLD is a solid choice for investors seeking to establish exposure to spot gold prices, given the fund’s unparalleled levels of liquidity and wild popularity amongst all types of investors. Cost-conscious investors should take a closer look at IAU however, since the fund offers virtually identical exposure for nearly half the price. GLD is destined to underperform relative to IAU; the vast majority of investors seeking to access gold would be better off with IAU.
Written By Stoyan Bojinov From CommodityHQ Disclosure: No positions at time of writing.
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