Physical Gold vs. GLD, Other ETFs, and ETNs

Gold ETFs

Gold ETFs, otherwise known as exchange-traded funds, provides investors and traders with an opportunity to capitalize on the gold price movement without purchasing physical gold whatsoever. They can avoid buying this asset class and still make money from it via a gold ETF like GLD.

Typically, a gold ETF has the same structure as a trust. With this structure in place, the issuer of the ETF owns a specific number of gold bars per ETF share issued. When you purchase a share of a gold ETF, you theoretically own a percentage of the gold held within the trust itself.

exchange traded funds

Since the ETF actually owns and holds onto this physical gold within the fund, the price of the ETF itself moves according to the current price of gold, whether looking at it in the short term or the long term. Nonetheless, the occasional tracking error will take place on a minor basis if the price of the ETF deviates from the price of the asset. On the occasions when this happens because of tracking errors, arbitrageurs will step in the rectify the situation.

Gold ETFs exist in abundance. But for the sake of this discussion, we will take a closer look at two choices that are currently the most popular right now.

GLD: SPDR Gold Shares

The ETF with ticker symbol GLD is currently one of the biggest gold ETFs available today. The fund is currently in possession of 36.49 million ounces of gold as of June 2020, and it’s being held in London vaults and other locations around the world. The net asset value of this gold is $63.43 billion. Breaking this down on a per-share basis, each of the ETF shares possesses a worth of 0.093995 gold ounces.

As gold experiences price movements, the price of GLD will also change accordingly. Investors also have the ability to alter the price to push it below or above the net asset value or NAV, which means that on occasion each individual share might have a lesser value or a greater value of the 0.093995 gold ounces.

gold shares

When this fund was first conceived, the shares were originally worth only about 1/10 of the actual gold price at the time. Nevertheless, it’s designed in a way that per share, the amount of gold that each share represents is eroded as time passes because investors are paying the ETF an annual fee of 0.4%. Because of these fees, the NAV lowers ever so slowly, which causes a reduction in the amount of gold that each of the shares is actually worth every year. But the fee is relatively modest, and this is especially true in conjunction with the long-term gains of gold.

According to data provided by the World Gold Council, since 1971, the average return for gold is 10% per year. To store physical gold each year, the typical investor pays more than 0.4%, which makes gold ETFs an efficient way to invest in this hot commodity.

IAU: iShares Gold Trust

This ETF is also a very popular choice, it’s named iShares Gold Trust and it is a BlackRock investment. Based on information gathered in June 2020, the $25 billion NAV is represented by 13.36 million ounces of gold. Right now, there are currently 1.5 billion outstanding shares of this ETF. So, on a per-share basis, each share is represented by 0.009547 gold ounces.

Like the other ETF, this number will erode each year because of the funds 0.25% expense ratio. And also similar to GLD, this ETF is part of an organized trust, which purchases physical gold and keeps its stored in different vaults in New York and London.

Leveraged and Inverse Gold ETNs

It’s also possible to invest in leveraged and inverse gold funds. But please be forewarned that these investment vehicles are much more complex than typical gold ETFs. In fact, none of these funds actually own physical gold and hold it as an asset within the trust. They trade as ETNs, otherwise known as exchange-traded notes, and they act as the ETN underwriter’s debt obligations.

Each of these ETNs typically tracks the price movement of a certain commodity index. Also, the underwriter’s creditworthiness is what gives it value since the ETN itself doesn’t actually own physical gold.

Inverse and leveraged gold ETNs are typically looked upon as trades for the short term. They track the daily movement of gold prices, and do not track long-term changes overall. Volatility has a way of magnifying losses over time with the use of leverage. Funds of inverse gold expect to experience negative returns for the long term because gold’s price typically rises in a system of fiat money.

UGLD: Velocity Shares 3x Gold ETN

The goal of this ETN is to give shareholders the opportunity to invest in a product that mimics three times the typical S&P GSCI Gold Index ER per day. As you can imagine, this is telling you that this is a short-term investment and nothing more. The ETN is a Credit Suisse issue and it maintains a 1.35% expense ratio.


DZZ: DB Gold Double Short ETN

This ETN mimics inverse price action when compared to gold prices. And being that it is a double short, as an example, if the price of gold rises by 1%, the DZZ value will drop by 2% since it is an inverse investment. This is a thinly traded investment and it has a 0.75% expense ratio. It was launched in 2008 by Deutsche Bank, but they suspended further issuances in 2016.

Final Thoughts

A straightforward investment is when a gold ETF operates as a trust. The trust issues shares and holds physical gold in one or more dedicated vaults around the globe. Each shareholder owns a fraction of the gold in the fund. And each share represents gold’s price movement to a specific ratio which could be 1/10 or 1/100 of the actual price of the metal.

For many, the cost-effective option is to buy an ETF as opposed to owning physical gold and paying storage fees. A more complex investment is called a leveraged or inverse ETN. They also track daily price changes of gold, but price movements will move in the opposite direction for an inverse investment. And neither inverse nor leveraged ETNs track the long-term changes in price for gold.

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