with a strong emphasis on physically back commodity trusts. They are a dominant player in the U.S. and Europe when it comes to accessing commodities through exchange traded products. Of course my interest and our conversation leaned towards ETF Securities’ gold ETF products listed in the United States. The firm has two unique products available, the ETF Securities Swiss Gold Trust (NYSEARCA:SGOL) and the ETF Securities Asian Gold Trust (NYSEARCA:AGOL). These products are the latest physical gold ETFs to launch in the U.S. – in 2009 and 2011 respectively – and introduced new choices to the marketplace. Here are a few highlights from the conversation.
Inventor Of Gold ETFs
Graham Tuckwell, CEO of ETF Securities, was responsible for launching the first physically back gold ETF in the world. The first product was launched in Australia, of all places, in 2003. The inspiration for this product came from the pricing inefficiencies Graham noticed between institutional gold prices and retail gold prices. (more on that later) Being the inventor of an entire product structure is certainly an honor, especially given the clear efficiency, liquidity and convenience exchange traded commodity ETFs have provided for investors. In addition, it is clear that this product opportunity came from someone with experience and involvement in the commodity space. That specialized knowledge of the commodity space continues to allow ETF Securities to design products tailored to the individual commodity space, according to Rhind.
Key Differences In Gold ETFs
William Rhind pointed out that ETF Securities believed strongly in delivering new choices to the marketplace when they launched their two gold ETFs. To accomplish this they focused on three elements of the physically backed ETF: expense ratio, vault location and corporate governance.
From an expense ratio standpoint, ETF Securities launched both gold ETFs at a price point slightly less than their largest competitor the SPDR Gold Trust (NYSEARCA:GLD). GLD is priced at 40bps while SGOL and AGOL carry 39bps expense ratios. While the cost difference is minor, it still is worth noting that both of ETF Securities gold ETFs are lower priced than the market leader GLD. This is especially interesting given GLD is over 35 times the size of the two ETFs combined.
Secondly using vault location as a product differentiator was a smart choice. William noted that ETF Securities was interested in Switzerland and Singapore as they both had a strong history of personal property rights, were viewed as countries that have exhibited neutrality and perhaps most notably have never confiscated gold. These elements combine to form a unique value proposition for investors who may be seeking diversification of historic risks to gold ownership or future threats. Here’s a breakdown of the gold vault locations for the four U.S. listed physical gold ETFs.
Finally ETF Securities’ focus on corporate governance was a crucial new point I took away from speaking with William. He explained that in ETF Securities experience, a focus on transparency around the ETF’s procedures for handling, storing and inspecting gold was foundational to earning the trust of investors. For that reason they delivered specificity in the prospectus around various procedures – even making provisions for a random annual third party audit of the gold stored in the vault. As Rhind put it “we want gold ETF investors to feel as close to being inside the vault as possible.”
The focus on transparency by ETF Securities is refreshing as some products have crafted vague prospectus language which has created a lack of confidence in physically backed gold ETFs by some. ETF Securities clearly identified those concerns and went out of their way to address them.
Checks & Balances Within The Gold ETF Structure
Another element of our discussion focused on the checks and balances pertaining to the actual gold held by the trust. Recent reports of fake gold bars turning up in New York’s Diamond District had me curious about the procedures in place to prevent physically backed gold ETFs from owning fake bars. In short, it appears fairly unlikely that fake or even sub standard (in terms of purity) gold bars could be held by the trust. As the process and procedures are fairly rigorous, here’s an overview of some of the checks and balances.
To begin with, gold ETFs can only hold gold bars that are of the highest quality. These are bars which meet the highest standards of quality and purity and are certified “good delivery bars” by the London Bullion Market Association or London Platinum Palladium Market (LBMA or LPMM). Only gold bars from a handful of refineries around the world can even qualify for this certification. Assuming a bar is certified, its unique serial number and identification markings are recorded for later inspections.
Gold bars held by gold ETFs must be of the highest quality.
As the gold trust introduces new bars of gold into the vault, they are first quarantined and inspected. Serial numbers and certification papers are examined to confirm identification. In addition bars are actually weighed as a secondary check.
Once new bars pass through the quarantine process and are introduced into the vault, these bars become involved in the regular inspection and auditing process. The custodian of the gold ETF – a different entity than the Sponsor of the ETF – produces a daily vault inspection report. In addition, the vault is audited regularly by third party inspectors (referred to as “specialist metal assayers”) to confirm details found in the custody report. Finally a random third party audit occurs each year as a triple check, so to speak. Each one of these checks and balances may include weighing gold, physically reconciling the serial numbers on gold bars with paperwork and even performing condition assessments of the bars of gold.
Between third party quality certifications, custodian and third party fund inspections and a randomly timed third party audit of the vault, it appears that a satisfactory check and balance system is in place for most shareholders to sleep sound at night.
William indicated that the products behind the origin of ETF Securities were designed to offer more efficient pricing – institutional caliber really – to retail investors. Graham Tuckwell realized there was a big difference between the price of gold for an institution – the interbank gold price – and the price of gold for an average investor. For example, estimates are that gold coins may sell for a 5 – 8% premium over the interbank gold price. ETF Securities saw an opportunity to offer that same interbank gold price to retail investors but with an additional cost of less than one half of one percent – in the case of SGOL and AGOL. Clearly this disruptive idea, which ETF Securities first presented to the world, has been a massive success. Today there is close to $155 billion invested globally in physical gold ETF products alone. Here’s a breakdown of U.S. listed physical gold ETFs from the GoldETFs.biz gold ETF list.
My conversation with William Rhind of ETF Securities led me to further appreciate the convenience and efficiency physical gold ETFs offer investors. I certainly left with a new appreciation for ETF Securities leadership in the global ETF landscape as a structural innovator and an advocate for transparency. I also was impressed with the “corporate governance” behind the ETF Securities physical ETF structure. The description of the process for handling and auditing of gold left me with more faith in the validity and efficiency of using physical gold ETFs as a proxy for actual physical gold ownership.
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.”