When it comes to gold ETFs, investors have many choices and it’s important to understand the key differences between the competing funds.
Some funds hold physical bullion while other ETFs use futures contracts to get exposure to the precious metal, which can lead to different tax treatment of capital gains, for example. [Gold ETFs to Play the Breakout]
“Gold is the ‘Armageddon currency.’ Its holders are naturally concerned about the rules of the game being changed on them–fraud, government expropriation, and, for the extremist fringe, the collapse of social order, are not inconceivable scenarios,” writes ETF analyst Samuel Lee at Morningstar.com. “While some gold bugs like to be able to fondle their bullion, the cost-conscious must make do with paper ownership, via exchange traded funds.”
The largest ETFs backed by gold bullion are SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).
GLD’s gold is held by custodian HSBC Bank in its London vault, while IAU’s custodians have facilities in New York, London and Toronto. The gold is routinely inspected by independent firms and the gold ETFs disclose lists of the gold bars.
However, SGOL “goes even further,” Lee says. The ETF’s gold is held in subcustodian UBS’s Zurich vaults.
“Switzerland’s centuries-long history as a haven for capital appeals to investors worried about the safety of claims on gold held in New York or London vaults by the other big gold ETFs,” he notes.