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(Kitco News) - After a quiet summer, interest in gold exchange-traded funds has picked up, with inflows continuing even as gold failed to break above $1,800 an ounce.

With the ultra-loose monetary policy from the global central banks and the Federal Reserve promising monetary stimulus until the jobs picture in the U.S. improves, investors have been returning to the gold ETFs. In October, gold ETF inflows reached 43.8 metric tons, according to Anne-Laure, precious metals strategist at BNP Paribas, with the biggest of the ETFs, the SPDR Gold Shares ETF (NYSE: GLD), capturing 15.5 tons.

State Street Global’s SPDR Gold Shares ETF is the dominant physically backed gold ETF, with about $75 billion assets under management; it’s also the second-largest ETF behind the SPDR S&P 500 ETF (NYSE: SPY). It has an annual expense ratio of 0.40%, with gold held in vaults in London.

The SPDR ETF is also the fund that gets most discussed in the media, especially when it comes to big-name investors like John Paulson or George Soros and whether they are buying or selling the fund.

Yet there are other physically backed gold ETFs which are growing in popularity, particularly Blackrock’s iShares Gold Trust (NYSE: IAU) and ETF Securities’ Physical Swiss Gold Shares (NYSE: SGOL).

The iShares ETF has about $11 billion assets under management and an expense ratio of 0.25%, and it stores its gold in vaults in London, New York and Toronto and elsewhere. The Swiss Gold Shares has $2 billion of assets under management, an expense ratio of 0.39%, but it stores its gold in Switzerland.

ETF analysts said a big reason for the iShare’s growth in assets under management is the lower fees.

“IAU has grown because of the lower expenses. For most people, the IAU makes sense, especially if you’re going to be a buy-and-hold investor. Why spend the extra 15 basis points?” said Carolyn Hill, ETF analyst at Index Universe.

Common investing wisdom is that the lower the fees, the better return for the investor, especially if the products are identical, which is pretty much the case for the physically backed gold ETFs, said Michael Johnston, director of ETF Database. 

“(It’s) why people look at the IAU; it’s the 15-basis-point discount in expense ratios. On that face alone, you’re going to outperform any other fund,” Johnston said.


When an investor considers buying an ETF for gold exposure, what role the ETF will play in his or her portfolio needs to come into consideration.

“If you are a buy-and-hold investor and you want gold exposure in your portfolio for five, 10, 20 years, you’re better with IAU because the expenses are cheaper,” Johnston said.

But that shouldn’t be the only consideration, said Jared Cummans, analyst at ETF Database.

“If you trade a lot, then use GLD,” he said, because of contract size difference ultimately makes it cheaper to trade.

The SPDR ETF and the ETF Securities ETF are both valued at 1/10th of an ounce of gold, meaning that if gold is trading at $1,700 an ounce, the contract’s value is $170. The iShares ETF is 1/100th of an ounce gold, or $17.

Tim Coyne, global head of the ETF Capital Markets group for State Street Global Advisors, explained that because of the size of SPDR ETF, the bid/ask spread is more cost effective. The bid/ask spread is the amount by which the ask price exceeds the bid.

Because the SPDR ETF is 1/10th of an ounce of gold, its bid/ask spreads are lower than ETFs priced with a smaller notional value, as a percentage of net asset value. Coyne said the bid/ask spread for SPDR ETF is currently one cent and because it trades at $170 per share versus $17 per share for the iShares, this spread amounts to less than one basis point, or 0.62 of a basis point.

“(It) means that the spread is important because if each product is priced at a penny spread - on the surface it doesn’t seem like much - the basis point of 1 cent of ($17) is significantly more than 1 cent on ($170),” he said.

A call placed to Blackrock’s iShares for comment was not returned.

Cummans also said for investors who are interested in the options market, the SPDR ETF has more volume and is a better choice over other gold ETFs.

The only other consideration for gold ETFs not related to cost is where the metal is stored. The diversification of storage location may be something that’s attractive to investors, although Hill, Johnston and Cummans said they see little need for that particular quality in an ETF.

“It depends on what you want. If you think it’s likely that London will get bombed and the vaults get destroyed, then maybe you want it. I don’t think that’s likely…. I don’t think storage diversification is important, but other people do and the fact that SGOL has $1.9 billion in assets shows they disagree with me,” Hill said.

Cummans said if an investor has a significant amount of gold tied up in ETFs, storage diversification might be worth it. “If you have a significant amount of money, maybe it makes sense to have it stored in a difference place on the idea of a very ugly tail risk/black swan event. It doesn’t cost that much to do,” he said.

He said the allure of a gold ETF with storage outside of London may also appeal to those who are worried about possible confiscation of gold, but  Cummans called that “an extreme event.”

Hill dismissed concerns about whether ETFs are holding actual gold. “Some people think the vaults are filled with aluminum painted gold, but I don’t agree. The vaults are holding gold. They’re audited yearly,” she said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

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