Gold ETF Investing: Why The Bid/Ask Spreads Matter (GLD, IAU, SGOL, AGOL)

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September 24, 2012 10:07pm NYSE:AGOL NYSE:GLD

Eric Dutram: Sometimes in the ETF world, products that appear similar can actually have very different returns. This can especially be the case in the precious metal ETF

market and one of the most popular segments of this world, the gold ETF space.

This corner of industry has some of the most popular funds including the ultra-famous SPDR Gold Trust (NYSEARCA:GLD) with over $70 billion in AUM and its cheaper but still wildly popular counterpart, the iShares COMEX Gold Trust (NYSEARCA:IAU). Beyond these two, ETF Securities, a European-based ETF firm, also has two reasonably popular physically-backed gold ETFs of its own; the Physical Swiss Gold Shares fund (NYSEARCA:SGOL) and the Physical Asian Gold Shares fund (NYSEARCA:AGOL).

These two funds from ETF Securities, while nowhere near as popular as IAU or GLD, are still attracting a decent amount of assets with SGOL possessing close to $2 billion and AGOL watching over just under $80 million. These two upstarts have managed to see a relatively strong inflow thanks to their 0.39% expense ratios and some of the more stringent disclosure requirements in the precious metal market today (watch Precious Metal ETFs 101).

Both of these funds physically store their gold in secure vaults and make sure that all bars conform to the London Bullion Market Association’s rules for Good Delivery. Furthermore, the list of allocated bars and copies of the bar counts are available daily for investors who are worried about their gold investment.

If that wasn’t enough, the two products also are audited twice a year in order to give investors further piece of mind over the safety of their gold ETF investment. Lastly, both track a benchmark of gold that uses the London Gold Market Fixing PM Fix Price as their standard (see Commodity ETFs in Focus as Fed unleashes QE3).

In essence, these funds have identical exposure, strategies, and are trading at a similar discount to NAV (at time of writing). Seemingly, the only difference is where the gold is stored as AGOL uses a Singaporean vault while SGOL employs a Swiss vault to store its precious metals.

Given that these two products are pretty much identical for all practical purposes, and since there isn’t some sort of geopolitical risk impacting either of the two nations—which might create a preference for one over the other—it is somewhat strange to note that there has been a relatively wide divergence in returns between these two similar products over the past few weeks.

In fact, over the trailing one month period, SGOL has outperformed AGOL by about 60 basis points while the Swiss-focused fund has also outperformed by a similar amount in QTD and YTD metrics as well. Meanwhile, from a one year look, AGOL has significantly underperformed SGOL, losing about 5.6% compared to a 4.5% loss for SGOL in the same time frame (read Bet on a Gold Comeback with the Gold Explorers ETF).

Clearly, while these two funds are pretty much identical—except for the reasons highlighted above—they have not produced the same return in any meaningful time period, how can this be?

Besides the location of the assets stored, the only real difference between the funds is the bid-ask spread that these two enjoy on a regular basis. This spread between the most someone is willing to buy a fund for and the least someone is willing to sell a particular security for can vary greatly among ETFs and can contribute significantly to a divergence in performance.

This is especially true for AGOL and SGOL, as the two funds have extremely different asset levels and also volume amounts as well. In fact, SGOL trades about 95,000 shares in a normal day and has a bid ask ratio of just .03% on average, while AGOL sees under 1,000 shares move hands on a regular basis and a bid ask ratio of roughly 0.87% on average, according to

While this might not sound like a huge deal, it can be a big contributor to varying performance levels. In fact, for SGOL, it means that the spread between the bid and the ask is just one penny wide, while the same metric for AGOL comes in at just over one dollar (171.13 bid and a 172.19 ask at last look), representing pretty big cost for investors seeking to purchase AGOL on the open market (read Play the Gold Standard Debate with These ETFs).

So while the expense ratio might be the same for AGOL and SGOL, the total cost of trading the two ETFs is actually quite different. Investors in AGOL have to pay a significant premium over the spot price in order to obtain exposure in a way that SGOL’s buyers do not.

This difference is the key reason for the relatively strong performance of SGOL over its Asian counterpart in the time frame, as from a strictly NAV look, both funds have had the exact same performance in the trailing one year period. Basically, SGOL has been better able to track the price of gold since it is more frequently traded, allowing arbitragers to easily step in and keep the Swiss product much closer to its Net Asset Value than its AGOL counterpart which has deviated more significantly and trades in a wider range around the NAV.

This realization has very useful impacts for traders and investors seeking to make investments not only in gold ETFs, but in any segment in which multiple ETFs are traded. Funds that have tighter bid ask spreads will generally do a better job of tracking the NAV and thus are more appropriate for investors seeking the highest possible correlation with underlying prices.

The only thing to remember is that this bid ask spread should not be the only determinant in selecting one ETF over another. Instead, it should be but one of a host of important factors that investors need to consider when picking the right ETF for their portfolio (see more in the Zacks ETF Center).

However, the factor is clearly overlooked despite the impact that it can play in the return for two very similar ETFs, as well as its impact on total trading costs. For these reasons, a look at the current spread between the bid and the ask prices is a key item to take into consideration, and the main reason for the return divergence between ETF Securities’ two very similar ETFs so far in 2012.

Written By Eric Dutram From Zacks Investment Research  

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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