A New Favorite Gold ETF

Parking money in gold, whatever happens to its price, is a pain. If you buy coins or bullion, you need insurance and secure storage. That’s why we recommend you own gold through exchange-traded funds. A price war makes gold ETFs even more attractive.

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Only two gold ETFs were worth your trouble a year ago -- SPDR Gold Shares (symbol GLD) and iShares Comex Gold Trust (IAU). The two are similar. Both hold bullion in U.S. vaults as opposed to tracking the price of gold with derivatives. Until recently, both sported a 0.40% expense ratio. The SPDR fund’s shares represent one-tenth the price of an ounce of gold minus the fund expenses. Shares of the iShares Comex fund cost 1/100th the price of an ounce less fees.

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At the time, you had to give the edge to SPDR Gold Shares because of its massive size. As of June 30, GLD held $51.4 billion, compared with $3.5 billion in IAU. SPDR Gold Shares holds two-thirds of the money invested in all the precious-metals ETFs. This heft translates into more liquidity and lower trading costs.

A new competitor entered the market last September and upset the balance. ETF Securities, a London firm that is a large fund sponsor in Europe, introduced Physical Swiss Gold Shares (SGOL). This fund is attractive for a couple of reasons. First, it charges 0.39% in annual fees, which was a lower expense ratio than that of its competitors at the time the fund debuted. Second, fervent fans of gold love Swiss gold because of President Franklin D. Roosevelt. In 1933, FDR issued an executive order that required U.S. citizens to deliver their private stashes of gold bullion, coins and certificates to the Federal Reserve in exchange for cash. The U.S. government restricted private gold holdings until 1974. Switzerland became a haven for gold investment by Americans who wanted to skirt the rules. Some gold fanatics fear a return of U.S. investment restrictions, so they welcome and prefer SGOL, which has $594 million in assets, to its rivals.

Changes to gold ETFs did not stop with the formation of the Swiss fund. On June 30, iShares cut Gold Trust’s expense ratio from 0.40% to 0.25%. The fee difference isn’t huge in actual dollars, though over a long time and if you have a large position, it can add up. If you have $10,000 in IAU, you pay $25 a year in fund fees. The same investor forks over $40 a year for GLD, or $39 for SGOL. All these ETFs essentially do the same thing: hold real gold. So unless you are worried Congress or the Federal Reserve or the president will somehow confiscate the metal, Comex Gold Trust is the best choice.

Gold Trust is not perfect. It has a lower share price than SPDR Gold Shares or Physical Swiss. That means if you pay trading commissions based on the number of shares, rather than the dollar amount of the investment, you will spend more to buy and sell Gold Trust than the other two gold ETFs. Too many trades and your savings from the narrow difference in fees will vanish.

But Gold Trust’s price cut already appears to be tipping the scale in its favor. According to Index Universe, a Web site that covers ETFs and index investing, that fund gained $59 million in net assets the week after the price cut was announced. Roughly the same amount of money left its rival, GLD, that week. If this persists, GLD’s sponsor, State Street, might reduce fees, too. We have seen aggressive price-slashing of ETFs before. Charles Schwab, Fidelity and Vanguard started to offer commission-free ETFs to win more clients.