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.