iShares Gold Trust ETF

Investopedia

The SPDR Gold Shares ETF (NYSEARCA: GLD) tracks the price of gold bullion in the over-the-counter (OTC) market. The trust that is the sponsor of the fund holds physical gold bullion as well as some cash. Gold is a precious metal commodity. Many investors want to hold physical gold as a hedge against an overall decline in economic conditions as well as against inflation. Some may use it as a method of portfolio diversification.

The costs of buying gold, insuring it and storing it can be substantial for individual investors. The fund provides a lower-cost method to buy and hold gold. Shares in the exchange-traded fund (ETF) are very liquid. It is easy to buy and sell shares throughout the trading day at the prevailing market price. The structure of the fund allows for baskets of the underlying asset to be created and redeemed as dictated by market demand. Each share represents one-tenth of an ounce of the price of gold. However, investors should not expect to convert their shares into physical gold.

How It Tracks It

The fund tracks the price of gold by holding gold bullion in a trust. The gold bullion is kept in the form of London Gold Delivery bars of 400 ounces, held in an allocated account. The physical gold is held by the custodian in a vault in London or in the vaults of other sub-custodians.

The fund has an annual tracking error of around 0.93%. The tracking error is the difference between the price of the ETF and the underlying spot price for gold. It is caused mainly by the expenses charged for managing the fund, transactions costs and whether the fund holds any cash. It is difficult to avoid tracking error. It does not appear that the GLD tracking error is unreasonable, as any fund tracking a benchmark is likely to suffer from this.

Shares are purchased from the trust for the fund in baskets of 100,000 shares. The trust issues these shares in baskets to authorized participants, usually large financial institutions, on a constant basis. The baskets are offered at the net asset value (NAV) at the price on the day that an order to create a basket is accepted by the trustee. These shares are then sold to the public at the prevailing market price for gold and the ETF. The fund holds substantial amounts of physical gold. It held 22.9 million ounces of gold with a market value of around $27 billion at the end of 2014.

Management

The sponsor of the ETF is World Gold Trust Services. The marketing agent is State Street Global Markets. The trustee is BNY Mellon Asset Servicing. The custodian of the physical gold is HSBC Bank. SPDR issues a number of popular ETFs, from funds that track the major stock indexes to fixed-income ETFs. It is likely the most visible company in the ETF space.

Characteristics

The fund has an expense ratio of 0.4%. While this is not outrageous by any stretch, there are other gold ETFs with lower expense ratios. For example, the iShares Gold Trust has an expense ratio of 0.15%. Still, GLD has a daily volume of around 5.5 million versus 2.3 million for the iShares Gold Trust.

For most investors, the difference in the expense ratio is likely to be minimal in their bottom lines. Fluctuations in the spot price of gold will have a much larger impact on returns.

Investors can buy shares in the fund through any broker. They trade on the NYSE Arca exchange. Some brokers may allow investors to trade shares without any commissions. GLD was the first ETF to track the price of gold and began trading in 2004.

Suitability and Recommendations

Investors could use GLD to speculate on the price of gold. It is much easier to buy and sell shares of the ETF than to buy and trade physical gold. Shares of GLD are much more accessible for most investors versus holding gold futures contracts. Gold futures contracts involve a substantial amount of leverage, which can amplify both profits and losses.

Another purpose for GLD may be for portfolio diversification. Under the tenets of modern portfolio theory, investors can reduce the amount of risk for a portfolio by diversifying the assets in the portfolio. The fund has a beta of around 0.3 with a monthly volatility of around 0.86%. It is less volatile than the overall market and does not necessarily follow the movements of the market. Thus, the fund may be a good way to diversify holdings with stocks and other types of assets.

Still, investors should be careful when making a long-term investment in the fund. The Internal Revenue Service (IRS) has determined that GLD is deemed a collectible. Any profits are taxed at a much higher rate of 28% versus the normal long-term capital gains rate of 15%. This tax wrinkle has caught many investors off guard. There are two ways to get around this: exit any position in under a year, or hold the shares in an IRA or another tax-deferred retirement account.

How Financial Advisor Clients Could Use This ETF

Many investors are wary of potential drops in the larger stock market. They may see gold as an attractive physical asset. The fund is an easy way to own an interest in the physical asset without the risks and costs of owning actual gold bullion. The fund may also serve as an easy way to diversify a portfolio with a precious metal commodity. Historically, gold has held its value well during times of financial instability, since it is not correlated with the stock markets.

Main Competitors and Alternatives

There are a couple of other ETFs that also track the price of gold. Further, there are leveraged gold ETFs, as well as ETFs that track gold miners. The aforementioned iShares Gold Trust tracks the metal with a lower expense ratio. There is also the Physical Swiss Gold Shares ETF, which has a similar expense ratio of around 0.39% but only has around $833 million in assets under management (AUM). GLD is by far the most popular and most liquid of the gold ETFs.

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