Tips on Selecting the Right Gold ETF

Advisors know that gold is an appropriate and desired asset class for many clients. It’s also one that’s become easier to access thanks to exchange traded funds.

In a bygone era of investing, advisors didn’t have many choices when it came to servicing clients’ gold investing demands. The primary options were participation in the futures market, which isn’t suitable for all clients, or holding physical bars and coins. To this day, some clients may prefer the latter, but it requires security and storage – both which have associated costs.

The debut of the SPDR Gold Shares (NYSEARCA: GLD) in November 2004 dramatically altered the gold investing landscape. GLD is the “first US traded gold ETF and the first US-listed ETF backed by a physical asset” and its shares represent ownership in physical. With nearly $59 billion in assets under management, GLD is the world’s largest gold-backed ETF and the biggest commodities ETF of any stripe.

“For many investors, the costs associated with buying GLD shares in the secondary market and the payment of the Trust's ongoing expenses may be lower than the costs associated with buying, storing and insuring physical gold in a traditional allocated gold bullion account,” according to the issuer.

Indeed, GLD has benefits and it’s long been an advisor favorite, but there other factors for advisors to consider when evaluating gold ETFs.

Gold ETF Points to Ponder

Today, there are six US-listed gold ETF with at least $1 billion in assets under management. However, nearly $88 billion of those assets are allocated to GLD and the iShares Gold Trust (NYSEARCA: IAU), which debuted just two months after GLD.

Owing in large parts to first mover advantages and advisor trust of the issuers, GLD and IAU are the behemoths of the gold ETF landscape. While relevant, those are superficial statistics and don’t necessarily make GLD and IAU the “best” gold ETFs.

GLD and IAU have an advantage in that they’re most heavily traded gold ETFs, meaning a client’s total cost of ownership is capped to some extent, but liquidity considerations are more important to active traders, not buy-and-hold investors.

“Trading costs are more complicated than fees. They can vary drastically depending on the type of investor. Buy-and-hold investors that would trade infrequently are far less exposed to the liquidity risk of these ETFs than a daily trader. For the market makers and proprietary trading firms trading millions of dollars worth of gold ETFs each day, trading costs add up quickly,” notes Morningstar’s Bryan Armour.

Working on the premise that advisors won’t be frequently trading in and out of gold ETFs on clients’ behalves, expense ratios are meaningful. On that note, the 0.40% and 0.25% charged annually by GLD and IAU, respectively, are unappealing when considering there are cheaper options on the market.

Confirming that GLD is more a tool for institutional traders, State Street Global Advisors (SSGA) introduced the SPDR® Gold MiniShares® Trust (NYSEARCA: GLDM) five years ago. Proving the 0.10% annual fee is attractive, GLDM, which doesn’t garner the headlines or have the institutional following of GLD, has $6.34 billion in assets under management.

As With Any ETF, Feeds Matter with Gold Funds

Gold ETFs are no different than their equity of fixed income counterparts in that fees should be a centerpiece of the evaluation.

After all, that’s the primary reason why the iShares Gold Trust Micro (NYSEARCA: IAUM) and the aforementioned GLDM are the best-performing gold ETFs over extended holding periods.

“Investors can easily boost returns by choosing low-fee options. For the 12 months through April 2023, investors returned 3.72% before fees for each ETF (the lone exception being iShares Gold Trust Micro IAUM, which earned 3.75%). When holding these ETFs, the one with the lowest fee will win in the long run,” concludes Morningstar’s Armour.

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