ETFs as an Investing Option for Gold

With investors looking for a hedge against a high-inflation environment, gold is currently a hot commodity, and there is more than one way to invest in it. Although owning physical gold like bars and coins can provide the comfort of being able to literally hold an investment in your hands, those same qualities can make it cumbersome and less streamlined for a very active investor. Gold exchange-traded-products, such as exchange-trades-funds (ETFs) are one option for someone who is interested in trading in gold, but does not want to think about issues like storage or collector’s value.

“It’s cheaper, and that’s the main advantage,” said William Rhind, Strategic Director of U.S. Business Development at ETF Securities. “It’s more liquid, there are no premiums or discounts and it’s based on the spot price. You also know exactly what you’re buying and you don’t need to get it assayed.”

The concept of gold ETFs is that an investor purchases shares of a fund from a trading company at spot price, though a broker or financial advisor may charge commissions associated with the purchase or sale of shares. The company will also charge an annual expense ratio. For example, ETF Securities’ current ratio is 0.39 percent per annum.

“It’s not like a futures contract that is based on a promise to deliver a certain amount of gold upon redemption,” said Rhind. “The way that it works is that when you buy the shares, the amount of gold has to be delivered into our vault first before we can issue the shares. Think of the shares as something akin to a vault receipt for a lump of gold.”

ETF Securities designed the first-ever gold ETF in 2003. Currently, the company has two gold products, the Switzerland-based SGOL, and the Singapore-based AGOL, which was launched in January of 2011. As with gold investing in general, gold ETFs have seen a recent surge in popularity. Rhind says that since the fund was created in 2009, SGOL has grown from nothing to about US $1.3 billion, and AGOL has grown to nearly US $60 million since January.

No two ETFs are the same, and investors should look at several factors before buying shares, depending what they are looking for in an investment. If high liquidity is a demand, a big fund is good quality to look for. Different companies also have unique expense ratios. An obvious consideration is whether the fund you invest in is audited regularly and is fully backed by physical gold.

“Every share held by investors is backed by gold, so it doesn’t matter whether investors are buying or selling, those shares are always backed,” says Rhind. “There could never be a situation where there is a share of ETF Securities in issue that is not backed by gold.”

Some investors are also concerned about the physical location where the fund’s gold is being stored, though Rhind says this comes down to personal preference more than anything.

“A lot of it is emotive with gold and some investors like their gold to be stored in certain locations,” said Rhind. If you’re an Asian investor you may feel like your preference would be to have gold stored closer to you in Singapore. If you’re a European investor you might feel more comfortable with it in Switzerland.”