Which Gold ETF Should You Own?

By Matt Cavallaro | October 04, 2011 AAA

Gold rallied last week, ending a four-week skid. The rebound suggests a halt to the recent slide and investors who want to get to the gold party late, rather than never, may want to consider doing so now. There are several ways to invest in gold. Exchange-traded funds are one of the better options for retail investors looking to gain gold exposure, yet not all gold ETFs are equal. Which ETF should investors who want to add gold to their portfolio choose?

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Risk Factors and Costs
Before picking a gold ETF, investors who are new to both ETF and commodity investing should understand some basic risk factors. Gold ETFs attempt to track the price of real gold bullion. Investors who buy shares of gold ETFs are not buying actual gold bullion. When an investor purchases a share of a gold ETF, the grantor trust company who runs the fund issues shares out of a pool backed by gold bullion that they own. When new gold ETF shares are created to meet growing demand, the grantor trust buys more gold bullion, which is then deposited into a custodian account.

This process creates some subtle differences and risk factors for gold ETF investors, such as creation and sub-custodian risk. Fortunately, these incremental risks are generally minimal from fund to fund, and normally do not make a material impact. The true differentiators that gold ETF investors must look at are cost structure, measured primarily by the expense ratio, and liquidity.

Which Gold ETF Should Retail Investors Go With?
One of the most popular and liquid gold ETF is the SPDR Gold Trust (NYSE:GLD). The SPDR Gold Trust's advantage over other gold funds is greater liquidity, which tightens bid-ask spreads, making it most likely the best option for investors looking to actively trade the ETF. Part of the reason the SPDR Gold Trust's market cap ($67 billion) is so much bigger than other gold ETFs, is institutional ownership; big investors who are better served by the enhanced liquidity.

For retail investors, the iShares Gold Trust (NYSE:IAU) may be another attractive option, because of the lower expense ratio. The iShares Gold Trust expense ratio of 0.25% is much lower than the 0.40% expense ratio of the SPDR Gold Trust. The lower cost structure and last year's 10-for-1 stock split to make the price point more accessible, demonstrate iShares' focus on retail investors. As a result of the stock split, iShares Gold Trust currently trades near $16, whereas the SPDR Gold Trust and the ETFS Gold Trust (NYSE:SGOL) both trade near $160. Of course, bid-ask spreads and commissions factor into the total cost of a gold ETF purchase. Investors making relatively large dollar value trades, may see little price advantage that would make IAU more competitive than GLD or SGOL. Smaller retail investors, however, would likely benefit from IAU's lower expense ratio.

Mining ETFs are another way to play gold. This can be accomplished through the Market Vectors Gold Miners ETF (NYSE:GDX) which tracks large-cap miners. The Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) tracks small-cap miners, offering a higher risk-return profile, compared with the Market Vectors Gold Miners.

The Bottom Line
Over the past month, stock prices of miners have come down along with gold and gold ETFs. Trading near $1,640 per troy ounce, gold is well off the all-time high set earlier this year. The recent correction is a potential entry point for new and existing gold bugs. In addition to valuation, the fundamentals of the gold trade are still intact. Gold's status as the de facto safe-haven global currency and sustained demand for the precious metal from emerging economic superpowers India and China, are long-term catalysts. Considering these factors, gold is an extremely attractive asset class and diversification tool. Of all the gold ETFs available, the iShares Gold Trust could be the optimal way for retail investors to add some bling to their portfolio. (For additional reading, take a look at Who Holds The Largest Gold Reserves?)

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