SGOL Abrdn Physical Gold Shares ETF

Gold made a strong start this year, but it has been sliding for the last four months, due to a combination of various factors. However, if we look at the longer term, for the last eleven years, gold has been gaining popularity and seeing regular price increases.

Lingering economic concerns, the relentless Euro-zone debt crisis and a still high American unemployment rate is expected to continue to support the prices of precious metals this year also. Rising inflationary expectations due to continued easing of policies from the central banks and low interest rates across various developed and emerging economies are making investors shift towards precious metals like gold for safety in these uncertain times.

Acting as an inflation hedge, a gold investment is considered a safe haven investment in both the economic upturns and downturns. It offers diversification benefits for the long-term investors making it the most valuable and attractive metal in the world. (Read: Gold ETFs Surge On Fed Outlook)

Demand/Supply Balance

Gold is poised to benefit from the lack of other alternative sources of investments. Foreign exchange reserves are generally concentrated in the top rated fixed income assets and gold. At present, investing in U.S. treasury notes offers little in terms of yield and euro denominated debt is risky. As a result, the central banks, particularly in the developing countries, are increasing their holdings in gold reserves given the risks involved in the fixed income assets amid uncertain economic growth.

China has been the largest consumer of gold followed by India, which has trailed since last year. Both countries accounted for about 40% of the annual consumption on a combined basis. A slowdown in these countries would have an adverse impact on the demand of gold.

Finally, gold prices are inversely related to U.S. dollars since the global gold trade is priced in greenbacks. A sharp uptick in U.S. dollars can led to a decline in gold prices and vice-versa. (Read: Gold ETFs May Continue to Shine in 2012)

Given the increasing traction of gold as a safe haven, investors should include it in their portfolios. The development of gold ETFs had made this even easier for investors, as these products are liquid and can often come with lower expense ratios when compared to what investors usually see in gold bullion investments.

Types of Gold ETFs

Gold ETFs are divided in three categories: Futures, Physically Backed Gold ETFs and Gold Mining ETFs Equity. Each of which we will breakdown for investors looking to get in on this increasingly important market segment:

Physically Backed Gold ETFs

These ETFs seek to match the spot price of gold, net of fees and expenses, and own gold bars to back the shares. Each share represents a fractional interest in the trust. The two largest gold ETFs in the space are SPDR Gold Trust (GLD) issued by State Street and COMEX Gold Trust (IAU) issued by iShares. Two more options come from ETF Securities via their Physical Swiss Gold Shares (SGOL) and Physical Asian Gold Shares (AGOL). Although they are smaller funds, both trades with good volume, giving investors another option to trade in this category.

With total assets of $67.86 billion, GLD tracks almost 100% the physical price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Each share represents about 1/10th of an ounce of gold at current prices.

On the other hand, IAU having AUM of $9.5 billion is backed by physical gold under the custody of JP Morgan Chase Bank in London. Each share represents about 1/100th of an ounce of bullion at current prices.

Though not a low-cost choice due to its 40 bps expense ratio, GLD does have a lower bid ask spread which could make total costs slightly less for this popular fund. IAU charges only 25 bps in fees a year making it the best low-cost choice in the entire gold ETF space. The product allocates 100% of its assets to gold on a daily basis, ensuring a good tracking error. While this is good, the bid/ask spread is worse than what investors see in the State Street product.

The other options have similar fees to GLD although they both beat it by one basis point. In terms of securing the commodity, SGOL holds physical gold bullion bars of secure vaults in Zurich, Switzerland while AGOL holds bars of secure vaults in Singapore under the custody of JPMorgan Chase Bank, USA.

With respect to performance, these products have delivered excellent annual returns of around 15% in the one-year period (March 2012). Being highly traded, investors might consider these products in their portfolio. (Read: Three Best Gold ETFs)

Future-Based Gold ETFs

These ETFs track the performance of the yellow metal using various derivative instruments such as futures, options and swaps. Investors seeking exposure to this category have a variety of options to choose from:

The top fund in the category was from the issuer PowerShares – DB Gold Fund (DGL) initiated in January 2007 and the three ETNs (exchange-traded notes) – DB Gold Short ETN (DGZ), DB Gold Double Long ETN (DGP) and DB Gold Double Short ETN (DZZ) launched in February 2008. These products track the performance of the DBIQ Optimum Yield Gold Index Excess Return plus the interest income from U.S. Treasury bills, net of fees and expenses.

DGL is a simple and highly traded fund with average daily volume of $7.9 million. With total assets of $386.2 million, the fund charges low 50 bps in fees per year with good tracking error and a small bid/ask spread. Further, its impressive performance makes it a better strategic fit for investment as it delivered annual returns of more than 14% as of March 2012. On the other hand, DGZ with total assets of $38.6 million has an inverse relation to the movement of gold prices.

DGP, having AUM of $511.4 million, delivers twice the return of the index performance on a monthly basis while DZZ, having AUM of $97.5 million, delivers twice the inverse (opposite) return of the index performance. DGP initiates a long position in the gold futures market while DZZ initiates a short position. Trading with good volume, these products charge a fee of 75 bps per year and are suitable for risk tolerance investors. The DGZ and DGP delivered excellent returns of more than 20% in the one-year period (as of March 2012) while DZZ generated unimpressive returns—to say the least-- of negative 40.2% in the same time frame. (Read: Precious Metal ETFs Slump On Bernanke Testimony)

Second comes the ETFs issued by ProShares – Ultra Gold ETF (UGL) and UltraShort Gold ETF (GLL) in December 2008. These funds seek to deliver twice the return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. The former has a direct relationship with the price of gold while the latter has an inverse relationship. GLL makes profit when the market declines and is suitable for hedging purpose against the fall of gold prices.

UGL holds AUM of $374.8 million while GLL holds $138.3 million. The ETF does not invest in gold bullion directly, rather it uses financial instruments (swap agreement, futures contracts, forward contracts and option contracts) to gain exposure to the precious metal. This indirect approach might introduce additional tracking error leading to extra cost. Already, investors need to pay 95 bps in fees per year, which is higher than the other gold ETFs but below the category average of 110 bps.

Despite the high costs, UGL trades with a good average daily volume of about $27.8 million and generated more than 24% in annual returns (as of March 2012). On the other hand, GLL has underperformed, producing negative returns of 37.4% per annum (as of March 2012).

In October 2011, another issuer VelocityShares initiated two similar ETNs – 3x Long Gold ETN (UGLD) and 3x Inverse Gold ETNs (DGLD) but with three times (3x) exposure. The products seek to replicate the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses. UGLD, having AUM of $23.4 million, provides long exposure to 3x the daily performance of the index while DGLD, having AUM of $2.4 million, provides 3x the inverse exposure.

Since the products can be extremely volatile, it is suitable only for traders and those with a high risk tolerance. Trading in small volumes, both ETNs charge investors higher fees of 135 bps per year each and had delivered negative returns of about 10% since inception.

Gold Trendpilot ETN (TBAR) is another future-based gold ETN, issued by RBS in February 2011. Unlike other products in the space, the index utilizes a systematic trend-following strategy providing exposure either to the price of the gold bullion or the cash rate depending upon the relative performance of the gold price on a simple historical moving average basis.

If the gold price is at or above the historical 200-Index business day simple moving average for five consecutive business days then a positive trend is established. Alternatively, if the gold price is below such average then a negative trend is established and the index will track the cash rate, which is the yield derived from a hypothetical notional investment in T-bills.

The former strategy will cost investors 100 bps in fees while the latter strategy will cost 50 bps per annum. Despite being the high-cost choice in the space, the fund generated impressive annual returns (as of March 2012) of 11.5%. This practice seems to attract investors seeking safe exposure during the turbulent times in the gold market.

Investors expecting a rise in gold price relative to large-cap U.S. equities in a day or less can find FactorShares 2x Gold Bull/S&P 500 Bear (FSG) an intriguing option. The fund seeks to replicate twice the daily return of the Gold Bull/S&P500 Bear index. Actually, the product tracks the spread, or difference in daily returns, between gold and U.S. equity market segments primarily by establishing a leveraged long position in the gold futures contract and leveraged short position in the E-mini S&P 500 stock price index futures. Launched in February 2011 with AUM of $9.3 million, FSG generated negative return of 4.1% over the past year (as of March 2012). This ETF is useful for value or alternative investing and hedging purpose. It is generally less expensive and more efficient than trading and managing a comparable spread portfolio.

Investors seeking exposure to a portfolio of commodity futures through a single investment may consider ETRACS UBS Bloomberg CMCI Gold ETN (UBG). The ETN seeks to replicate the performance of the UBS Bloomberg CMCI Gold Total Return index, net of fees and expenses. The product delivers collateralized returns from a basket of gold futures contracts, which are diversified across five constant maturities ranging from three months to three years. This is the low-cost choice in the space and generated attractive returns of about 16% over the last year (as of March 2012).

Equity-based Gold ETFs

The fund in this category mainly tracks the index consisting of gold mining and exploration companies. There are 8 ETFs available in this category:  

Gold Explorers ETF (GLDX)

The fund, issued by Global X in November 2010, is one of the largest and actively traded funds. This fund seeks to match the performance and yield of the Solactive Global Gold Explorers index, before fees and expenses. The stocks in the index comprise liquid international stocks involved in gold exploration and are considered to be the largest in the space.

With total assets of $26.4 million, the product is more than 50% concentrated in top 10 companies, which include Chesapeake Gold Corp. (CHPGF), Pretium Resources, Inc. (PVG) and Seabridge Gold, Inc. (SA). The fund mainly consists of small cap companies of Canada and holds 26 stocks in total.

The product charges investors 65 bps in fees per year. The performance of the fund has been negatively impacted by the slump in the overall market in the second half of the last year, thereby delivering negative 45% returns over the last one-year period (ending March 2012). However, it pays out a descent dividend yield of 2.84% per annum. (Read: Has The Junior Gold Mining ETF Lost Its Luster?)

Market Vectors TR Gold Miners (GDX)

This fund is the largest in the gold mining category with AUM of more than $6 billion. Launched in May 2006, the product provides exposure to worldwide stocks involved primarily in the mining for gold. It uses a full replication strategy holding 31 stocks in the NYSE Arca Gold Miners index.

The fund is more concentrated in the top 10 companies, as these account for more than 77% of the assets. The stocks in the fund represent a diversified blend of small, mid and large capitalization stocks. Barrick Gold Corporation (ABX), Goldcorp Inc. (GG) and Newmont Mining Corporation (NEM) are the top three holdings.

The majority of companies are based in Canada followed by the U.S., South Africa, Mali, and Peru. The ETF had given lackluster performance, generating negative returns of 17% over the last year. However, it is inexpensive given low fees of 53 bps per annum, small bid/ask spread and good tracking error. The fund also yields small 0.33% of annual dividend.

Market Vectors Junior Gold Miners ETF (GDXJ)

Launched in November 2009, GDXJ provides exposure to global small and mid-cap stocks that generate a minimum 50% of revenues from gold/ silver mining, hold real property that produces at least 50% of revenue from gold/ silver mining when developed, or primarily invest in gold or silver. The fund is highly volatile, less liquid and trades in lower volume.

With AUM of about $2 billion, the product tracks the price and yield of the Market Vectors Junior Gold Miners index. It uses a full replication strategy holding 86 stocks and puts about 27% of assets in top 10 firms.  Top three holdings include B2Gold Corp (BTO), Perseus Mining Limited (PMNXF) and Silvercorp Metals Inc. (SVM).

Canadian companies hold the top spot in the basket followed by Australia, Latin America, Europe, U.S., Asia and Africa. This ETF delivered negative 33% annual returns and charges investors a fee of 56 bps a year. However, the fund yields an attractive dividend of 5.40% on an annual basis, making it a relatively safe investment for the long term.

Global Gold and Precious Metals Portfolio (PSAU)

The fund, issued by PowerShares in September 2008, tracks the NASDAQ OMX Global Gold and Precious Metals index. It measures the overall performance of the largest and most liquid stocks globally that are involved in the mining of precious metals. With 86 stocks in total, the fund puts more than 50% of its assets in the top 10 companies, including Barrick Gold, Goldcorp, Newcrest Mining Limited (NM) and Newmont Mining.

The fund allocates more than 40% of its assets in Canada while South Africa and the U.S. also have a major asset base. PSAU is also quite expensive compared to the other gold mining ETFs and generated unimpressive negative returns of 18.41% per year (as of March 2012). The product yields about 1.38% of dividends annually.

MSCI Global Gold Miners Fund (RING)

Investors seeking exposure to gold mining companies in both developed and emerging markets may find the most recent launch, RING, an interesting play. With AUM of $$20.2 million, the fund seeks to replicate the performance of the MSCI ACWI Select Gold Miners Investable Market index, holding 42 stocks in total. The stocks in the fund do not involve gold hedging but operate gold mines.

The fund concentrates on the top 10 companies, holding about 70% of the shares. Barrick Gold, Goldcorp, and Newmont constitute the top position in the basket. Giant and large companies hold a substantial 50% of the assets and the rest are governed by mid and small cap stocks. The fund charges a low fee of 39 bps per year. (Read: Top Three Precious Metal Mining ETFs)

Pure Gold Miners ETF (GGGG)

Similar to GLDX, this fund tracks the Solactive Global Pure Gold Miners index. With total assets of $4.5 million and holdings of 27 stocks, the fund allocates more than 50% of its assets in top 10 companies. Koza Altin Izletmeleri, Eldorado Gold Corp (EGO), and Alamos Gold Inc. (AGI) are the three biggest holdings. The fund mainly consists of mid-cap companies, the majority of which is based in Canada.

Unlike GLDX, the product charges a low fee of 59 bps and generated lower negative annual returns of about 24%. Additionally, the fund pays out 2.18% of annual dividend.  

In addition to these gold mining and exploring ETFs, Direxion Shares initiated two leveraged ETFs – Daily Gold Miners Bull 3x Shares (NUGT) and Daily Gold Miners Bear 3x shares (DUST) in December 2010, which provide three times exposure to the underlying index. These funds seek to replicate the price and performance of the NYSE Arca GoldMiners index. NUGT having AUM of $14 million, has a perfect correlation with the returns of the index while DUST having AUM of $15.1 million, has an inverse correlation with the index returns.

These products are expensive relative to the other ETFs in the gold space. NUGT had delivered dull negative returns of more than 50% in the past one-year period (as of March 2012) while DUST delivered an impressive annual returns of 11%.

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ETFS-ASIAN GOLD (AGOL): ETF Research Reports
 
PWRSH-DB GOLD (DGL): ETF Research Reports
 
PWRSH-DB GD 2XL (DGP): ETF Research Reports
 
DB-GOLD SHORT (DGZ): ETF Research Reports
 
DB-GOLD DBL SHT (DZZ): ETF Research Reports
 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
ETFS-GOLD TRUST (SGOL): ETF Research Reports
 
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