The Physical Gold ETFs Go Head-to-Head
November 18th 2010 at 1:00pm by Tom Lydon
If you’ve considered an investment into any of the physically-backed gold exchange traded funds (ETFs), then you’ve probably wondered what makes each one unique. Millions of investors have considered these funds, and we think it’s worth looking under the hood of each.
Although all three physically-backed gold ETFs share characteristics in common – the main one being that all of them hold physical gold in vaults around the world – they have some differences, too. They can be different on cost, the audit process or even the type of gold by which each share is backed. And, of course, many ETF investors are no doubt familiar with the rumors that these ETFs don’t hold the gold they claim to.
To answer your questions and lay any fears to rest, we caught up with the three physically backed gold ETF providers to talk about their ETFs, what makes them different and the audit process each one goes through.
We’ve listed each one in order of total assets.
SPDR Gold Shares (NYSEArca: GLD)
- Assets: $56.8 billion
- Expense ratio: 0.40%
- Inception date: Nov. 12, 2004
- Who is the custodian*? HSBC
- How was the custodian chosen? Jim Ross, State Street’s senior managing director, says, “HSBC was originally chosen because they’re the largest custodian of gold in the world. When we were doing the selection process, they were, in our opinion, the most capable and understanding of how to custody gold.”
- How many sub-custodians** are there in GLD? The sub-custodians available for use by the custodians as of Dec. 31, 2009, are The Bank of England, Brinks Ltd., Via Mat International and LBMA market-making members.
- Where is the gold bullion physically kept? All gold is kept in London.
- Is any of the gold held in the United States? No.
- How is the gold moved in and out of the vault? “This isn’t as exciting as people think,” Ross says. The non-technical explanation is that unallocated bars are bought at the location of the vaults. When the bars are allocated, the shares are created. The allocation process involves taking the gold bars from one side of the vault to another.
- What is the quality of the gold*** in the trust****? Everything is London good delivery bars, which, Ross says, “In our view is the highest quality of gold holding you can have. It’s what the gold market trades on.”
- Who conducts the vault audits? The vault is audited up to three times a year. The audit process, Ross says, takes months. Even if one were to go in and simply count the bars, it would take more than a day; when the trust is audited, the bars are measured and weighed. The Bank of New York, the trustee, is allowed to inspect the vault. Delloitte is the auditor, and they come in twice a year.
- Is 100% of the gold in the trust audited? Inspectorate International conducts two audits each year. One is a complete bar count on Sept. 30. The second count is at random and is a random sample count.
- Does GLD publish a bar list? Yes, and it’s updated daily to reflect the movement of bullion in or out of the trust. The list can be found here and here.
- Does GLD or its sub-custodians engage in the lending of gold? No.
- Does GLD ever hold cash or derivatives? From time to time, cash is held and used to pay expenses, though cash held by the trust doesn’t generate income. No derivatives are held.
iShares COMEX Gold Trust (NYSEArca: IAU)
- Assets: $4.6 billion
- Expense ratio: 0.25%
- Inception date: Jan. 21, 2005
- Who is the custodian*? JP Morgan Chase. iShares’ Kevin Feldman says that until Sept. 1, IAU had multiple custodians; JP Morgan is now the sole one.
- How was the custodian chosen? “They were selected for their leadership position in the gold space,” Feldman says.
- How many sub-custodians** are there in IAU? JP Morgan is the custodian; Scotia Bank is a sub-custodian.
- Where is the gold physically kept? One of the unique features of IAU, says Feldman, is its multi-vault process. Gold is custodied in Toronto, New York and London. The decision to hold gold in multiple vaults was made after taking a look at what was important to clients. Holding gold in multiple locations results in geographical diversification.
- Is any of the gold held in the United States? Yes – in New York.
- How is the gold moved in and out of the vault? With larger banks trading in gold, it’s mostly an electronic process.
- What is the quality of the gold*** in the trust****? Gold that meets COMEX or London Bullion Market Association (LBMA) standards is in the trust.
- Who conducts the vault audits? Inspectorate International; two are done per year, one at random.
- Is 100% of the gold in the trust audited? Yes.
- Does IAU publish a bar list? Yes. It’s updated weekly and can be found here.
- Does IAU or its sub-custodians engage in the lending of gold? No.
- Does IAU ever hold cash or derivatives? No.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
- Assets: $1.03 billion
- Expense ratio: 0.39%
- Inception date: Sept. 9, 2009
- Who is the custodian*? JP Morgan
- How was the custodian chosen? “We use them because they custody a lot of our other business, we have a good relationship and they can facilitate the business of vaulting gold in Switzerland,” says Will Rhind, head of sales and marketing at ETF Securities.
- How many sub-custodians** are there in SGOL? One, in Zurich.
- Where is the gold bullion physically kept? At vaults in Switzerland.
- Is any of the gold held in the United States? No.
- How is the gold moved in and out of the vault? The authorized participant (AP) executes the creation, then delivers the metal directly to the account of the custodian. It’s then transferred from unallocated to allocated. At that point, the trustee releases shares to the AP and those are delivered to the client. Shares are allocated on the same day that gold is allocated to the trust, says Rhind, thus eliminating overnight risk to the custodian.
- What is the quality of gold*** in the trust****? All gold is London good delivery bars.
- Who conducts the vault audits? Inspectorate International conducts the audits, which are done twice a year: one at random and one at end end of the calendar year.
- Is 100% of SGOL audited? Yes.
- Does SGOL publish a bar list? Yes, and it’s updated daily. The list can be found here.
- Does SGOL or the sub-custodian engage in the lending of gold? No.
- Does SGOL ever hold cash or derivatives? No, Rhind says. The creation/redemption mechanism is done purely on metal entitlement – there’s no other way to create or redeem the product.
Which gold ETF should you choose? It comes down to what means the most to you. If it’s lower cost, you’ll probably be happiest with the cheapest gold ETF. If the audit process or who manages the trust is of more importance to you, then pick the ETF you’re most comfortable with. If you’re more concerned with geographical diversification, then consider where each fund holds its gold, figure out what you’re comfortable with and proceed accordingly.
*Custodian: The organization that is responsible for safeguarding and holding the gold.
**Sub-Custodian: A situation in which the custodian holds some or all securities through another custodian in a local market. For example, the custodian may be in London, while the sub-custodian is in New York or another locale.
***Gold Quality: There are varying standards for rating gold quality. London good delivery bars are commonly viewed as being the very highest quality because the London Bullion Market Association’s standards are seen as the toughest. There are more than 30 types of gold bars circulating in the world’s gold markets today, and London good delivery bars comprise the largest market.
****Trust: Where the gold is physically kept.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.