Sometimes in the ETF world, products that appear similar can
actually have very different returns. This can especially be the
case in the precious metal ETF market and one of the most popular
segments of this world, the gold ETF space.
This corner of industry has some of the most popular funds
including the ultra-famous
SPDR Gold Trust (
with over $70 billion in AUM and its cheaper but still wildly
popular counterpart, the
iShares COMEX Gold Trust (
. Beyond these two, ETF Securities, a European-based ETF firm, also
has two reasonably popular physically-backed gold ETFs of its own;
Physical Swiss Gold Shares fund (
Physical Asian Gold Shares fund (
These two funds from ETF Securities, while nowhere near as
popular as IAU or GLD, are still attracting a decent amount of
assets with SGOL possessing close to $2 billion and AGOL watching
over just under $80 million. These two upstarts have managed to see
a relatively strong inflow thanks to their 0.39% expense ratios and
some of the more stringent disclosure requirements in the precious
metal market today (watch
Precious Metal ETFs 101
Both of these funds physically store their gold in secure vaults
and make sure that all bars conform to the London Bullion Market
Association's rules for Good Delivery. Furthermore, the list of
allocated bars and copies of the bar counts are available daily for
investors who are worried about their gold investment.
If that wasn't enough, the two products also are audited twice a
year in order to give investors further piece of mind over the
safety of their gold ETF investment. Lastly, both track a benchmark
of gold that uses the London Gold Market Fixing PM Fix Price as
their standard (see
Commodity ETFs in Focus as Fed unleashes QE3
In essence, these funds have identical exposure, strategies, and
are trading at a similar discount to NAV (at time of writing).
Seemingly, the only difference is where the gold is stored as AGOL
uses a Singaporean vault while SGOL employs a Swiss vault to store
its precious metals.
Given that these two products are pretty much identical for all
practical purposes, and since there isn't some sort of geopolitical
risk impacting either of the two nations-which might create a
preference for one over the other-it is somewhat strange to note
that there has been a relatively wide divergence in returns between
these two similar products over the past few weeks.
In fact, over the trailing one month period, SGOL has
outperformed AGOL by about 60 basis points while the Swiss-focused
fund has also outperformed by a similar amount in QTD and YTD
metrics as well. Meanwhile, from a one year look, AGOL has
significantly underperformed SGOL, losing about 5.6% compared to a
4.5% loss for SGOL in the same time frame (read
Bet on a Gold Comeback with the Gold Explorers
Clearly, while these two funds are pretty much identical-except
for the reasons highlighted above-they have not produced the same
return in any meaningful time period, how can this be?
Besides the location of the assets stored, the only real
difference between the funds is the bid-ask spread that these two
enjoy on a regular basis. This spread between the most someone is
willing to buy a fund for and the least someone is willing to sell
a particular security for can vary greatly among ETFs and can
contribute significantly to a divergence in performance.
This is especially true for AGOL and SGOL, as the two funds have
extremely different asset levels and also volume amounts as well.
In fact, SGOL trades about 95,000 shares in a normal day and has a
bid ask ratio of just .03% on average, while AGOL sees under 1,000
shares move hands on a regular basis and a bid ask ratio of roughly
0.87% on average,
according to XTF.com
While this might not sound like a huge deal, it can be a big
contributor to varying performance levels. In fact, for SGOL, it
means that the spread between the bid and the ask is just one penny
wide, while the same metric for AGOL comes in at just over one
dollar (171.13 bid and a 172.19 ask at last look), representing
pretty big cost for investors seeking to purchase AGOL on the open
Play the Gold Standard Debate with These ETFs
So while the expense ratio might be the same for AGOL and SGOL,
the total cost of trading the two ETFs is actually quite different.
Investors in AGOL have to pay a significant premium over the spot
price in order to obtain exposure in a way that SGOL's buyers do
This difference is the key reason for the relatively strong
performance of SGOL over its Asian counterpart in the time frame,
as from a strictly NAV look, both funds have had the exact same
performance in the trailing one year period. Basically, SGOL has
been better able to track the price of gold since it is more
frequently traded, allowing arbitragers to easily step in and keep
the Swiss product much closer to its Net Asset Value than its AGOL
counterpart which has deviated more significantly and trades in a
wider range around the NAV.
This realization has very useful impacts for traders and
investors seeking to make investments not only in gold ETFs, but in
any segment in which multiple ETFs are traded. Funds that have
tighter bid ask spreads will generally do a better job of tracking
the NAV and thus are more appropriate for investors seeking the
highest possible correlation with underlying prices.
The only thing to remember is that this bid ask spread should
not be the only determinant in selecting one ETF over another.
Instead, it should be but one of a host of important factors that
investors need to consider when picking the right ETF for their
portfolio (see more in the
However, the factor is clearly overlooked despite the impact
that it can play in the return for two very similar ETFs, as well
as its impact on total trading costs. For these reasons, a look at
the current spread between the bid and the ask prices is a key item
to take into consideration, and the main reason for the return
divergence between ETF Securities' two very similar ETFs so far in
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ETFS-ASIAN GOLD (AGOL): 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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