Gold ETFs (Exchange Traded Funds) have become increasingly popular over the last fifteen years or so. Most ETFs offer a form of tracking or passive investments that aims to replicate a market return, or get as close to it as they can. Here we look at the top ten best gold ETFs.
ETFs were initially conceived as an easy way for investors to be able to invest in benchmarks and indices, particularly those investors who didn’t have access to futures and options trading. Typically, retail clients and institutional investors with restrictive mandates, that prohibited them from accessing derivatives markets.
Where to buy Gold ETFs
You can buy Gold ETFs through a stockbroker that offers access to ETFs. It’s important to remember that whatever broker you use is regulated by the FCA. You can view our comparison table of ETF broker where we compare market access, fees, costs and service.
|ETF Broker||How can you invest in ETFs?||How much does ETF trading cost?||More Info|
|Account Fee: £9.99 monthly|
Standard Deal: £7.99
Discount Deal: £3.99
FX Conversion: 1.5%
|Account Fee: 0.45% yearly|
Standard Deal: £11.95
Discount Deal: £3.95
FX Conversion: na
|Account Fee: £0|
Standard Deal: £8
Discount Deal: £3.99
FX Conversion: 0.5%
|Account Fee: £0|
Standard Deal: £3
Discount Deal: £0
FX Conversion: 0.5%
Your capital is at risk
|Account Fee: 0.25% yearly|
Dealing charge: From £1.50
per online deal
Discount: £4.95 for shares,
where there were 10 or more online share
deals in the previous month
US Shares: £9.95
plus FX charges
Open ended Gold funds
ETFs are structured in a similar way to mutual funds in that they are open ended vehicles whose value rises, and falls based on the performance of the underlying investments, rather than being influenced by the supply and demand for the units of the fund itself.
Which is the case in many closed end fund structures such as an investment trust, that typically manages a fixed pool of money and has a fixed number of shares or fund units in circulation.
ETFs were popularised by the likes of Vanguard and designed to appeal to the masses by offering tracking as a low-cost alternative to active fund management.
Though ETFs were originally designed to track equity indices, it soon became apparent that they could do the same thing for individual industry sectors, investment styles, such as value or growth, and indeed other asset classes such as commodities.
By the mid noughties an increasing number of Gold and Silver ETFs were being launched including funds that tracked the price and performance of gold.
The appeal of investing in Gold through ETFs
Gold has always had a special appeal to investors and traders but prior to the emergence of Gold ETFs those who wished to invest in gold faced limited choices.
They could buy gold coins or bullion, but the ownership of physical gold came with its own issues around security and transportation etc. Alternatively, there were gold certificates and other forms of so called “paper gold” but they came with issues and questions around counterparty risk and liquidity.
Finally investors could put their money into gold mining shares, though counter intuitive as it might sound, the valuations of gold mining shares don’t always follow changes in the price of gold itself, because the mining businesses are influenced by many other factors and not just the price of the commodity.
The introduction of gold ETFs on the gold price changed all that and did so literally overnight.
A brave new world of investing in Gold through ETFs
Gold ETFs allowed investors and traders to gain exposure to the gold price. The ETFs could be traded just like any other stocks and shares and what’s more because of the nature of the ETF structure and market making process, clients could trade on the long or the short side with equal ease. That flexibility coupled with the low-cost nature of ETF ownership created a whole new world of trading and hedging opportunities. Many of which, had once only been available to hedge funds and investment banks.
Today there are 18 notable ETFs that offer investors and traders exposure to the gold price and in the table below we have set out the top ten names in the sector, ranked by Assets Under Management or AUM, in millions of US$. AUM is simply a measure of the amount of money currently invested in the funds.
The figures in the table below are as of the close of business in the week of 6/03/2020
|Symbol||ETF Name||Total Assets ($MM)||YTD performance||Avg Volume|
|GLD||SPDR Gold Trust||$51,709.15||10.25%||10,404,200|
|IAU||iShares Gold Trust||$20,786.62||10.34%||21,349,650|
|SGOL||Aberdeen Standard Physical Gold Shares ETF||$1,542.75||10.19%||903,139|
|GLDM||SPDR Gold MiniShares Trust||$1,465.39||10.24%||1,808,615|
|BAR||GraniteShares Gold Trust||$738.23||10.32%||251,440|
|UGLD||VelocityShares 3x Long Gold ETN||$268.14||29.68%||134,497|
|AAAU||Perth Mint Physical Gold ETF||$219.94||10.17%||102,511|
|OUNZ||Van Eck Merk Gold Trust||$216.93||10.10%||68,147|
|DBP||Invesco DB Precious Metals Fund||$150.35||6.45%||42,710|
|UGL||ProShares Ultra Gold||$146.28||19.59%||129,418|
Source GMG Research/ETF Database
The largest gold ETF is also one of the oldest the SPDR or “spider” Gold Trust which was launched back in 2004. And which at the time of writing had more than US$ 50.0 billion dollars invested in it.
According to the fund’s factsheet, as of 31/01/2020, the fund had a lifetime return of +8.32%. gold itself had returned +8.75% over the same period. The small differential between the two figures is accounted for by the 0.40% fund fees and a very minor tracking error on the part of the fund.
Tracking error is the degree to which an ETF fails to capture the market or benchmark return.
In well managed relatively vanilla funds such as the SPDR Gold Trust these are likely to be very small and therefore inconsequential in the grand scheme of things, as they are likely to be lower than the admin and storage costs incurred by individual clients, in the ownership and storage of physical gold.
However, in more complex ETF and ETF-like structures tracking error can be an issue and can be brought about by the way in which the fund provider, or creator hedges their exposure. If the hedge that they have put in place fails to fully reflect the price changes of the underlying, then you can incur a tracking error.
ETF investors and traders should always do their research and make sure they understand and are happy with the way that the ETF manager hedges their exposure. Luckily enough there is plenty of information about leading ETFs and their holdings and policies etc, online.
For the record the SPDR Gold Trust is hedged and backed by physical gold holdings that are administered by bankers HSBC.
Why trade gold ETFs and what to look out for when choosing your fund?
Gold has always been seen as a store of value particularly in periods of conflict or economic uncertainty during which inflation has often reared its head. Persistent Inflation undermines or reduces purchasing power which means that the money in your pocket or bank account buys fewer goods and services, than it did previously.
This decline in the value or worth of paper currency can be compounded if a government tries to print its way out of trouble. Investing in gold has long been seen as a way to guard against such devaluation or erosion.
Of course, in recent times the specter of rampant inflation has receded. In fact, central bankers and governments in developed nations would actually like to see it return.
In the absence of inflation gold has been seen as an ideal alternative investment and one that is not highly correlated to other asset classes. As with all commodities however gold has relationship with the US dollar (and by extension FX markets) a stronger US dollar has historically been negative for commodity prices whilst a weaker US currency has been bullish for commodity prices in the past.
Gold prices are also driven by investor sentiment or rather changes within it. Gold prices tend to rise as traders become more fearful or risk averse. And gold acts a safe haven in times of market turmoil, when markets are typically in a risk off mood. The opening quarter of 2020 provides a classic example of this relationship that likely accounts for the gains seen in the year to date in the table above.
When considering which ETF to trade or invest in you should look at the size of the fund, its liquidity, that is the number of shares traded in its average daily volume. As well its fees and structure. It’s always a good idea to look at the fund’s fact sheet and compare its performance/ returns and costs with those of the peer group. In general, the larger and more liquid the fund the better.
Risks and rewards of buying Gold ETFs
As we previously noted, ETFs have made it much easier for retail investors to trade in a wide variety of asset classes, investment styles and strategies. But as with any investment or trading activity, dealing in gold ETFs is not without its risks as well.
In terms of the rewards, ETF trading private investors can benefit from the very low fees offered by ETFs compared to other types of funds. By including precious metals such as gold in their portfolio they get an opportunity to diversify and hedge or to put it plainly not have all of their eggs in one or two baskets such as bonds and equities.
Using a gold ETF to gain exposure to the yellow metal will be a cleaner and simpler experience for most investors, than trading a gold derivative. If you invest in a “vanilla” gold ETF via the cash markets, using a stockbroker or ETF provider, then there will be no leverage or expiry dates to worry about.
The risks involved in trading standard ETFs on gold or many other assets are the same as those encountered when trading stocks and shares. That is your view is wrong or you buy too early or sell too late etc.
That said there are some other issues to consider: we have already discussed the possibility of tracking error within an ETF but there is also scope for investor error. That can come about through choosing the wrong product or failing to understand the product.
This won’t be so much of a problem with standard ETFs, but it could be an issue with more exotic fare such as leveraged and inverse ETFs.
For example, ticker UGLD (No.6 in the table above) is the VelocityShares 3x Long Gold ETN. This is an exchange traded note that is three times levered i.e. its price moves three times as much that of the price of gold. This an instrument specifically designed for short term (intraday) speculation and not buy and hold strategies.
Inverse ETFs or ETNs such as ticker DGLD: the VelocityShares 3x Inverse Gold ETN are designed to move in the opposite direction to the price of the underlying asset they are tracking.
Such that a fall in the price of gold will mean a rise in the value of the ETF/ETN and vice versa. These inverse ETFs can also be leveraged, and if they are then their prices will move in multiples of the changes seen in the price of gold. Once again, they are products designed for short-term speculative trading and not, longer term investing.
Gold ETFs allow traders and investors to trade the gold price whether that be as hedge, outright speculation or portfolio diversification. As with all investment opportunities it’s important to do your research before you trade, making sure you understand the product you are trading and its suitability for you and your individual circumstances. If you are in any doubt about this you should get professional advice and guidance.