In a blog last week, I explored the positions two high-profile
hedge fund managers, John Paulson and George Soros, are taking in
the SPDR Gold Shares (NYSEArca:GLD), the huge gold ETF.
In that piece, I compared the round-trip cost over the course of
a year of buying, holding and selling GLD with the cost of the
iShares Gold Trust (NYSEArca:IAU). I stand by this analysis as it
relates to retail investors.
After all, the average spreads and expense ratio figures I
quoted are indisputable. Those are the round-trip costs a retail
investor is likely to have to pay in buying and selling the
Different Investors, Different Costs
The problem is I used two institutional investors to make my
case. As I attempted to touch on, liquidity means different things
to different investors. For example, when I stated that the two
funds are similarly liquid, that only holds true for retail
Sure, the average bid/ask spread for IAU is 0.06 percent
compared with 0.01 percent or less for GLD, but the difference in
share price plays a big role in that. After all, a penny spread on
GLD-a $160-a-share ETF-is significantly smaller on a percentage
basis than a penny spread on IAU, a $16-a-share ETF.
And that leads me into my next point:Because GLD represents a 10
of an ounce of gold compared with 1/100 of an ounce for IAU, we
must use the notional value of a position to compare apples with
apples. And this is where new frictions come into play for
institutional investors like Paulson and Soros.
When big players are trading 25,000 shares or more of an ETF, or
buying and selling block-sized trades, they have to work orders
with broker-dealers to ensure optimal pricing. These broker-dealers
may be nice folks, but they don't do their jobs for free.
In fact, the going rate for their services is usually about a
penny a share. Since IAU is one-tenth the price of GLD, the cost of
trading IAU will be significantly higher for the institutional
investors in question. Take the following example where one
investor trades $1 million in notional value of both GLD and
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