There are a variety of gold ETF and ETN products available in the U.S. marketplace — over 20 at last count. However, if you want to buy a gold ETF backed by physical bars of gold stored in a vault, there are only four product choices — albeit with over $84 billion of investor assets. To quickly narrow this group down to the most appropriate choice, here are the two questions an investor needs to answer.
The expense ratio is the fee an ETF charges an investor on the assets invested in the product. The fee is deducted over the course of 12 months. In general, the expense ratio is a combination of the operational costs of the ETF plus an amount of profit for the ETF Sponsor. While some advocate the use of the lowest cost expense ratio ETFs in all cases, a consideration of each ETFs’ unique value proposition relative to its expense ratio is a more thoughtful way of investing.
Physical gold ETF expense ratios currently range from a low of 25bps, or one quarter of one percent, to a high of 40bps. Here’s the chart breaking down each of the ETFs’ expense ratios.
While these fees are less than half of traditional mutual fund expense ratios, it is important to note that the percentage difference between the high and low expense ratios of these ETFs is almost 40%! That is a material amount and the reason expense ratios should be a part of the decision making process.
All physical gold ETFs are really the same product in terms of structure and operation. They all hold bars of gold in a vault which back the ETF shares being issued. They all trade on stock exchanges. They all have their physical gold holdings independently audited each year. The primary difference in these products — besides expense ratio — is the actual location of the vaults where the gold bars are stored.
Essentially there are two types of physical gold ETFs when it comes to gold storage. The first type of product stores its gold in a single country. The ETFs that follow this approach are GLD, SGOL and AGOL. Some investors see this as an attractive approach to contain geopolitical risk. The second type of physical gold ETFs takes a more diversified approach in its storage of gold by storing gold in multiple countries. Currently the iShares Gold Trust (IAU) stands alone in this diversified approach to gold storage. To some, this is an attractive diversification strategy to combat geopolitical risk.
Here’s a chart of the locations — as precisely as are available — of the storage of the gold bars backing the four gold ETFs available in the U.S. market.
Many investors are surprised to learn that GLD, the first and largest gold ETF, has all of its gold stored in not just a single country but in a single city. However unlike its peer group, GLD does not specify its single country bias in its name.
Secondly there appears to be a counterintuitive relationship between expense ratios and storage locations. Expense ratios are larger for ETFs with concentrated storage mandates, even though it would seem to be a less costly approach than multiple storage locations.
Physical gold ETFs were launched to offer investors a more convenient and transparent way to purchase gold. A basic two step process of examining expense ratios and storage locations should isolate the primary differences between physical gold ETFs and simplify the selection of the most appropriate physical gold ETF for any portfolio.