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Commodity ETFs

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As the future of the U.S dollar as global reserve currency remains uncertain, many investors—both here and abroad—have begun to diversify their assets out of greenbacks and into other mediums. While euros and other currencies such as the yen were popular for a while, the structural problems facing those economies are becoming extremely apparent to nearly every investor, forcing many to consider alternatives for diversification exposure. Ultimately, this quest tends to end up with the precious metals market, and more specifically, gold.

The precious metal remains a great diversifying agent for portfolios and a quality hedge for those looking to protect against broad market declines or a collapse in the dollar. Yet, while gold can be easily purchased online or at a local bullion dealer, there are some issues that one has to be aware off before going down this path. First, one must consider the wide spreads that dealers have for the precious metals, which are sometimes in excess of 5%. This added fee, which is generally on both sides of the transaction, is a heavy cost to bear for most investors and especially those dealing with small quantities of gold. Furthermore, there is also the issue of storage; unless one wants to throw their gold in the sock drawer, a safe or safety deposit box must also be purchased, again adding to the total costs incurred by precious metal investors (also see Avoid Turmoil With The Community Bank ETF).

Thanks in part to these issues, investors have begun to embrace ETFs as a trading tool that can offer the same exposure to gold but without many of the headaches outlined above. Trading is available throughout the day on all of these products, bid/ask spreads are extremely tight, and fees, thanks to intense competition, have been pushed to rock-bottom levels. However, investors should note that there are quite a few choices in the space and while all of them have their selling points, they are not created equal by any means. In light of this, we decided to take a closer look at three of our favorite products in the gold ETF space below:

SPDR Gold Shares (GLD)

For investors seeking extreme levels of liquidity, GLD is tough to beat in the gold space. The fund has over $71 billion in AUM and trades close to 17.2 million shares a day. In other words, the trust behind GLD holds more gold in its reserve than the nations of China or Switzerland, enough to put it in fifth if it were a sovereign country. Obviously with numbers like this it shouldn’t surprise anyone to know that the product trades almost as much in a day as all the other gold ETFs combined. However, investors should note that the product has expenses at the higher end of the scale in the gold ETF space, as the annual fee is 0.4%. Furthermore, investors should note that from time to time, the product isn’t 100% allocated to gold and can thus deviate slightly from the performance of the metal when markets are oscillating wildly. For performance, GLD has gained 20% since the start of the year and has lost 4.3% over the past three months (see Is USCI The Best Commodity ETF?).

iShares Gold Trust (IAU)

If expenses are your primary concern, IAU is the gold standard in this corner of the market. The fund charges just 0.25% in expenses per year, making it the lowest by far in the category. Investors should also note that the product allocates 100% of its assets to gold on a daily basis, ensuring a very accurate picture in terms of tracking error. For volume, the levels are pretty solid; IAU trades a little over 8.6 million shares a day. While this is good, it is obviously far less than GLD, suggesting that wider bid/ask spreads may be possible in this product (although it is unlikely). Additionally, investors should note that the product trades in increments of 1/100th of an ounce, giving it a far lower price per share than either of the other two products on the list which employ a 1/10th of an ounce of gold methodology instead. In terms of performance, IAU has slightly edged out GLD gaining 20.1% in year-to-date terms but it has led on the downside as well, falling by 4.3% over the past three months (also see Top 3 Best Performing Precious Metals ETFs).

ETFS Physical Swiss Gold Shares (SGOL)

SGOL is an interesting product in the gold space as it can’t compete with either fund on volume—trading less than 200,000 shares a day—nor can it really compete on price as expenses are 0.39% a year.  Still, the product has developed a cult following thanks to its unique storage system, allowing the fund to rack up close to $1.8 billion in assets. While the other gold ETFs hold securities in London, and North America, SGOL holds all of its gold in the nation of Switzerland. Specifically, all of the bullion is held in secure vaults in Zurich, a major city in the small landlocked country in Europe. This appears to have tempted investors who are worried about a gold confiscation program hitting the U.S. again, or those that are just looking to spread their assets around to one of the world’s premier banking destinations (see The Best Commodity ETF For 2011 And 2012).

For performance, SGOL has finished in the middle of the pack in year-to-date terms, gaining a tad over 20%. However, in terms of the last three months, SGOL has actually beaten out its counterparts by a few basis points, as the product has lost about 4.25% in the time period, thanks in part to SGOL trading at a slight premium to NAV. Nevertheless, this desire to move assets to Switzerland-based vaults appears to have, at least in the short term, allowed SGOL to beat out its counterparts in the gold ETF space.

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Author is long IAU and gold bullion.

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