For Immediate Release
Chicago, IL- June 10, 2016 – Today, Zacks Investment Ideas feature highlights Features: SPDR Gold Trust (GLD), iShares Gold Trust (IAU), PowerShares DB Gold Fund (DGL), UBS ETRACS CMCI Gold Total Return ETN (UBG) and Rex Gold Hedged S&P 500 ETF ( GHS).
Gold ETF Investing: Facts Investors Need to Know
Gold ETFs have come back into focus for many investors this year thanks to the soaring price of gold bullion in 2016. Gold is actually up about 20% so far this year which easily trounces broad markets in the time frame, while there has been quite a bit less volatility too.
This is in stark contrast to how the yellow metal had been performing for much of the past few years, as gold was mired in a serious bear market, pushing the commodity far lower than the S&P 500 over the trailing five-year time frame.
But with questions about future interest rate hikes and inflation hitting the market now, gold is definitely making a resurgence, putting gold ETFs into the spotlight once more. However, gold ETFs remain widely misunderstood by many investors out there and there are still several myths and misconceptions about investing in this space.
So for investors thinking about buying into this soaring market, it is important to know the following 10 facts about the gold ETF and gold mining ETF world in order to make sure you get the right type of exposure, and understand some of the most important details about investing in this market:
GLD Isn’t Everything in the Gold ETF World
Most investors who think of gold ETFs go right to the big dog in the space, the SPDR Gold Trust ( GLD). This ETF has over $35 billion in assets and a great daily trading volume, making it an easy pick for most.
However, there is another great option for investors out there that can get the job done, the iShares Gold Trust ( IAU). This product still has a robust volume and an impressive $8 billion in assets, but it is often overlooked despite its cheaper expense ratio, coming in at 25 basis points compared to GLD’s 40bps fee.
But in addition to the expense differential, there is another key factor to note. GLD trades as 1/10 of an ounce of gold while IAU uses a 1/100 scheme. This may not sound like a big deal, but it actually makes GLD have tighter spreads between its bid and ask which can be important for traders (see How to Trade Gold ETFs After 30 Year Rally).
So, traders and very large investors should probably stick with GLD as their preferred vehicle, but long term investors and those buying in smaller quantities would probably be better served by buying IAU instead. The expense ratio difference will really add up over time, and especially if you aren’t doing a whole lot of trading.
Futures vs. physical
Most commodity ETFs simply offer investors exposure to futures contracts tracking the commodity. But because precious metals have a relatively high ‘value-to-size’ ratio and are easy to store, investors have the option of either buying physically-backed ETFs like GLD or IAU, or purchasing futures-based funds like DGL and UBG.
Futures-backed funds can be more expensive and they also may suffer from futures curve issues (such as contango), though this can also become an asset (backwardation) in certain market environments too. Over the past year though, DGL has underperformed GLD and to me it probably isn’t worth it given the physical exposure options and the lower holding costs. Better to get the real thing in this case, and especially since most commodities don’t offer up the option at all.
The only saving grace is the issue of taxes. DGL may have a lower short-term capital gains tax rate than gold ETFs that hold the commodity thanks to their structure as a ‘commodities pool’. However, this may result in a K-1 at tax time, so there are some potential headaches with that approach too. For me, it seems like physically-backed is so rare in the commodity world and it gets rid of so many problems, that you might as well go for it in the gold world.
Another Way to Invest in Gold with ETFs
Two often overlooked ways to invest in gold include products that utilize hedging techniques. In essence, they invest in broad markets, but use gold as a sort-of hedge in order to mitigate risks.
A great example of this approach is (GHS) from REX. This ETF invests in both the S&P 500 and it takes a long position in gold futures contracts, making the ETF designed to outperform broad indexes when gold is soaring. This technique can also act as a bit of a hedge, since gold and broad markets generally have low correlation levels as well (see more about this strategy in our Inside the Gold Hedged Equity ETFs article).
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SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-GOLD TR (IAU): ETF Research Reports
PWRSH-DB GOLD (DGL): ETF Research Reports
E-TRC UBC GOLD (UBG): ETF Research Reports
REX-GLD HDG SP5 (GHS): ETF Research Reports
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