Max Wagner, a regular writer for Best ETFs Australia, shares his thoughts on two of the ASX’s top gold ETFs, the differences and what to look for when investing in gold.
Why investors own gold
Gold — and gold prices — has long been recognised as a store of wealth and a hedge for share portfolios. Gold is a physical asset which tends to have a negative correlation with shares. Meaning, when share prices fall, gold prices (in general) tend to rise. In this way, gold can be used to protect wealth in volatile or declining markets.
Some ETFs, such as the VanEck Vectors Gold Miners ETF (ASX: GDX) provide exposure to shares of gold mining companies rather than the physical metal, and so they may not provide the same diversification benefits. GOLD and PMGOLD both provide exposure to gold prices directly.
PMGOLD Vs. GOLD
Both the GOLD and PMGOLD ETFs provide investors with exposure to gold prices with their physically-backed securities. GOLD is backed by gold bullion held by JPMorgan Chase Bank in London, where the physical gold bars are individually identified and allocated.
PMGOLD is underpinned by government-backed gold stored in The Perth Mint’s vaults. The Perth Mint holds more than $5 billion of physical metal and refines more than 90% of the gold mined in Australia each year.
These ETFs have another common characteristic: units in each of the ETFs can be redeemed for gold bullion coins or bars. These ETF units essentially function as a call option, so an investor can choose to redeem their units and receive physical gold in exchange, starting from as little as one troy ounce.
The key differences
A key difference between the ETFs is the ownership of the gold. Investors in the GOLD ETF have an entitlement to the underlying asset held under a separate trust which owns the relevant amount of bullion. Investors in PMGOLD actually have no interest in or ownership of the gold unless they elect to redeem their holdings for physical gold.
A third difference is the fees. PMGOLD is the cheaper of the two ETFs with a management fee of 0.15% per year compared to 0.4% per year for the GOLD ETF. However, PMGOLD has a spread of 0.18% compared to 0.05% for GOLD, which means that you pay a higher “fee” when buying or selling. Spreads are explained in more detail here.
Which one is better?
There are many different types of gold ETFs and physically backed ETFs are just one option.
This comparison shows that even two ETFs which appear the same on the surface can function in very different manners. Picking between the two will come down to your risk appetite and whether or not you intend to redeem the units for physical gold. If you’re interested in these ETFs, I’d suggest you read our GOLD and PMGOLD reports and looking at the product disclosure statements before making a decision.
This report first appeared on Best ETFs Australia.