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All Contents © 2020The Kiplinger Washington Editors
By Kyle Woodley, Senior Investing Editor
| September 19, 2018
Gold investors typically tout several virtues of the yellow metal: It hedges against inflation, they say, it’s an uncorrelated asset that doesn’t move with the stock market and it can grow in value when national or even global uncertainty is high. Those features help build the bull case, which you can leverage via gold exchange-traded funds (ETFs).
Gold admittedly hasn’t given investors much to work with for years. After a decade-long run topped out in 2011 above $1,850 per ounce, prices slammed back to earth and have been stuck in a range between $1,100 and $1,300 since 2013.
Still, some people look to gold investing to diversify their portfolios, and aggressive investors can try to squeeze profits out of short-term swing trades. We recommend that if you do try your hand at this commodity, you understand the ins and outs of investing in gold, make it a small portion (5%) of your portfolio and use ETFs, for several reasons, including liquidity, low expenses and ease of use.
Here’s an introduction to seven low-cost gold ETFs that offer varying types of exposure to the precious commodity. This list includes the most ubiquitous gold ETFs on the market – funds you typically can read about in just about any daily commodity wrap-up – as well as a few that aren’t as well-covered by the financial media but might be better investments than their high-asset brethren.
Data is as of Sept. 18, 2018.
Market value: $28.7 billion
Expense ratio: 0.4%
The SPDR Gold Shares (GLD, $113.44) is the first U.S.-traded gold ETF, and as is the case with many “first funds,” it also has more assets than any of its competitors – by almost three times its closest rival.
SPDR Gold Shares is the prototypical gold fund: It represents fractional interest in physical gold bullion stored in vaults. That allows investors to participate in the upside of gold prices without having to deal with the hassles of physically storing, protecting and insuring bullion or coins. In the case of the GLD, the ETF’s price represents 1/10th an ounce of gold.
The GLD’s sheer size and popularity breeds several benefits for traders: The fund is extremely liquid and has tight bid-ask spreads, and its options market is more robust than any other traditional gold fund.
Its one glaring downside? A relatively high expense ratio – something competitors have tried to exploit, and something that SPDR is fighting back against (more on that in a minute).
Market value: $10.2 billion
Expense ratio: 0.25%
The iShares Gold Trust (IAU, $11.49) has long been the premier low-cost alternative to the GLD. That, as well as its relative longevity (inception was in 2005), have helped it amass more than $10 billion in assets under management.
IAU is similar to GLD in that its shares are meant to represent a fraction of an ounce of gold, though in IAU’s case, it’s 1/100th rather than the GLD’s 1/10th. Otherwise, it acts very similarly to SPDR’s gold ETF.
The iShares Gold Trust isn’t as liquid as the SPDR Gold Shares, and its bid-ask spreads aren’t as tight, so it’s not ideal for short-term traders. However, its significantly lower cost makes it a better buy for long-term buy-and-holders. Over the course of 30 years, assuming a $10,000 initial investment and, say, 5% annual growth, you would pay roughly $1,700 less in fees with IAU over the life of the investment.
Market value: $8.1 billion
Expense ratio: 0.53%
Gold ETFs that represent physical holdings are the most direct way to invest in gold via the stock market. But you can also play gold via mining stocks.
The very short exploration: Gold miners extract gold ore from a mine and then process it into gold. And they try to do that at a cost that’s less than the price they sell the gold for, generating a profit. The ideal situation: Holding gold miners that have low costs of production while gold prices are both increasing and higher than those companies’ costs to produce the gold.
One popular way to play this industry is the VanEck Vectors Gold Miners ETF (GDX, $18.43) – a collection of roughly 50 companies in the gold mining industry. This fund is weighted by market capitalization, which means the bigger the stock, the greater the percentage of assets GDX invests in it. The ETF is heavily weighted, then, in bigger miners such as Newmont Mining (NEM, 9.5% of assets), Barrick Gold (ABX, 7.0%) and Franco-Nevada (FNV, 6.8%). In fact, more than half the fund’s assets are concentrated in just the top 10 holdings – a condition that can be referred to as “top-heavy.”
One note: Gold miners tend to be more reactive to the price of gold than gold ETFs that actually hold the metal – when GLD improves, GDX tends to improve more, and vice versa. That’s great in boom times, and good for shorter-term trades, but it also means less stability over the long-term.
Market value: $4.4 billion
Expense ratio: 0.54%
Another way to leverage gold that’s even riskier than traditional miners but also has more “pop” potential: junior miners.
When you think of mining companies, you tend to think of the companies in GDX – they operate mines, process the ore and sell the gold. But there’s a lot that goes on first, and that’s where junior gold miners come in. These firms employ engineers and geologists to help discover new gold deposits, determine how big their resources are and even help start mines up.
These are highly risky companies given the nature of their work. A seemingly promising project could turn south overnight, decimating the value of the stock. These small companies typically aren’t flush with cash, either, so there’s not much of a backstop should disaster strike. The flip side? Success can send these stocks flying quickly.
Holding one or two of these stocks can be extremely risky. If you want exposure to this type of gold play, the VanEck Vectors Junior Gold Miners ETF (GDXJ, $27.46) spreads the risk across 70 such companies – names such as Kirkland Lake Gold (KL), Anglogold Ashanti (AU) and Yamana Gold (AUY).
However, even though the fund has more holdings and is less top-heavy than the GDX – top-10 holdings account for 42% of the fund’s assets – the riskier nature of GDXJ’s constituents results in slightly more volatile performance, for better or worse.
Market value: $271.1 million
Expense ratio: 0.20%
The GraniteShares Gold Trust (BAR, $119.59) might not be familiar to many investors. But this gold-backed ETF – built in the same vein as GLD and IAU – has done something impressive by amassing more than $270 million in assets in just over a year of trading; inception was at the end of August 2017.
In an interview late last year, GraniteShares CEO Will Rhind told Kiplinger, “We’re establishing a low-cost commodity ETF offering because no one has done that. That’s an important differentiator; Vanguard doesn’t do commodities.”
BAR is built similarly to GLD, with shares representing 1/10th the price of gold. But at just 0.2% in expenses, it undercuts both the GLD and lower-priced IAU. In fact, at time of inception, it was the cheapest gold fund on the market.
That has changed, on account of this next ETF.
Market value: $122.5 million
Expense ratio: 0.18%
SPDR has long had a stranglehold on the gold trading market, but the iShares Gold Trust slowly sapped away assets from the buy-and-hold crowd. It’s likely GraniteShares’ offering in summer 2017 was the final straw, because this year, the fund provider finally hit back.
The SPDR Gold MiniShares Trust (GLDM, $11.98), at just 0.18% in expenses, is now the lowest-cost gold ETF backed by physical metal. It’s similar to IAU in that each share represents 1/100th of an ounce of gold rather than 1/10th, but it costs 7 basis points less than its second-place rival.
This ETF now makes SPDR a total threat in the gold space. In addition to GLD and GLDM, the fund provider also launched the SPDR Long Dollar Gold Trust (GLDW) in January 2017 to attract investors who want to invest in gold despite a strong dollar (typically a hinderance to the value of gold, which is priced in dollars).
That means SPDR is poised to compete no matter what the investor needs, “whether it’s liquidity, trading efficiency, total cost of ownership or managing their exposures in a strong US dollar environment,” Joseph Cavatoni, Managing Director USA and ETFs for World Gold Council, said upon GLDM’s release.
Market value: $39.3 million
Expense ratio: 0.65%
The one thing most gold ETFs lack is income potential. Physical gold itself produces no profits or cash and thus can’t pay out any dividends. Gold miners occasionally pay out distributions, but that’s only a few, and payouts can be sporadic, so you can’t count on mining ETFs to deliver substantial, consistent income.
Thus, investors might be tempted to dabble in the Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI, $113.44), which currently boasts a yield of 6.2% – that’s high not just by gold standards, but for ETFs of any stripe.
But extreme caution is warranted.
The GLDI is an exchange-traded note, or ETN, which means it doesn’t actually hold anything like a fund does. Instead, it is just unsecured debt issued by Credit Suisse (CS) that’s thrown into an ETF “wrapper” that tracks an index. In this case, GLDI is meant to replicate a long holding in GLD that’s augmented with an income-generating options strategy called “covered calls.”
In theory, GLDI should enjoy some upside when gold prices improve, but also be able to generate income during down markets to help offset losses in GLD. In practice, GLDI is a long-term loser that has generated negative total returns (so, including those big dividends) across every major time frame since its January 2013 inception. That performance, coupled with the ETF’s complex mandate, is plenty of reason for most buy-and-hold investors to stay away.