Exploring Gold ETFs: An Investor's Guide to Top Funds, Trading and Performance Analysis

• Gold ETFs allow easy investment exposure to gold prices through buying shares of funds holding gold assets.
• Main types of gold ETFs include traditional physical backing, miners, inverse, leveraged, smart beta.
• Benefits of gold ETFs are liquidity, lower costs, flexibility, transparency, and accessibility versus direct gold.
• World Gold Council helped create the first gold ETF and continues promoting gold ETF demand.
• Steps to invest in gold ETFs involve selecting a specific fund, opening a brokerage account, funding it, placing trades.
• Top performing gold ETFs highlighted based on 5-year returns are IGLD, UGL, BAR, AAAU, GLDM.
• IGLD generates income from bonds/cash while partially capping gold exposure using options strategies.
• UGL doubles daily gold price moves using leverage but can deviate over longer periods.
• BAR directly owns physical London-stored gold bars, aiming to match spot price moves.
• AAAU offers physical gold exposure in smaller increments, but has higher tax rates.
• GLDM provides low-cost, smaller-share gold investment compared to GLD fund.
• Case study examines Sprott Gold Miners ETF composition and exposure to gold equities.

Exploring Gold ETFs

A gold ETF (exchange-traded fund) is an investment that makes it easy to invest in gold. An ETF allows investors to buy and sell shares of a fund on a stock exchange, just like a regular stock. But instead of containing regular stocks, a gold ETF contains gold bullion, gold futures contracts, gold mining company stocks, or other gold-related investments.

When you buy a share of a gold ETF, you get a small ownership stake in the gold assets held within that ETF. The value of your gold ETF shares will typically go up and down with the price of gold. So if gold prices rise, the value of your gold ETF investment will usually rise too. And if gold prices fall, the value of your gold ETF shares will usually decrease.

Gold ETFs make investing in gold simple. You can buy and sell shares easily on a stock exchange, just like regular stocks. And your investment return is tied closely to gold prices. So gold ETFs give investors an accessible way to add gold to their investment portfolio.

Main types of gold ETFs

There are ETFs that offer traditional, inverse, leveraged, equity-based and enhanced index-based exposure to movements in gold prices. The choice depends on one's investment objectives and risk tolerance.

• Traditional physically backed gold ETF: A traditional gold ETF will primarily hold gold bullions and coins as the assets. Buying shares in a physically backed traditional gold ETF is an effective way to take advantage of the benefits of gold investing without needing to own physical gold.
• Gold Miner ETFs: These hold shares in gold mining companies rather than physical gold. They move in line with gold prices as mining company profits are tied to gold prices.
• Inverse Gold ETFs: These are designed to move in the opposite direction of gold prices. They are used as a hedging strategy when gold prices fall.
• Leveraged Gold ETFs: These aim to multiply returns compared to changes in gold prices, typically by a factor of 2x. They use derivatives and other financial instruments to amplify exposure.
• Smart Beta Gold ETFs: These track custom gold price indexes that aim to outperform traditional benchmarks. They incorporate factors beyond just market cap weighting to optimise returns and use advanced index methodologies.

The Advantages of investing in a Gold ETF

Investing in a gold ETF offers investors several compelling benefits. As a tangible asset, gold provides wealth preservation in times of economic uncertainty and high inflation. Its role as a safe haven stems from gold retaining value despite currency fluctuations driven by geopolitical factors. Adding gold exposure improves portfolio diversification too due to its negative correlation with stocks. Gold ETFs specifically allow investors convenient liquidity, lower costs, daily flexibility, greater transparency, and easier access versus owning physical gold bars. 

The liquidity comes from gold ETFs trading on major stock exchanges, avoiding the challenges of buying and selling actual gold. Their minimal storage and insurance fees keep costs low. Gold ETFs can be actively traded all session long in a regulated, transparent market with reporting requirements revealing holdings. Finally, the ETF structure allows small investment amounts rather than the large minimums required for physical gold. In short, gold ETFs grant investors an inflation-hedging asset to stabilise and optimise portfolios during periods of volatility.

The Rise of Physically-Backed Gold ETFs

Gold ETFs have opened up gold investing to a wider range of investors by providing a low-cost, liquid, and transparent way to get exposure to the gold price. This has likely increased overall investment demand for gold. By allowing investors to avoid the storage, transportation, and insurance costs associated with owning physical gold, gold ETFs provide a more efficient means of investing in gold. 

Physically backed ETFs operating costs are typically around 0.4% per year. As of the end of 2022, globally there was over 3,500 tonnes of gold held in gold-backed ETFs. This represents a significant source of demand that can affect the balance between supply and demand. Since their introduction in 2003, gold ETFs have transformed the gold investment market. They have reduced total cost of ownership, increased efficiencies, provided added liquidity and access, and brought new interest in – and demand for – gold as a strategic investment.

Ongoing monitoring of gold ETF holdings and flows provides valuable insights into investor sentiment towards gold. Sudden changes can impact the gold price and signal shifts in the broader investment landscape. Gold ETFs have had a significant influence on gold investing and the overall market and tracking ETF trends is important for understanding gold price dynamics. 

Gold is a liquid asset, ranking at levels comparable to many global stock markets as well as currency spreads. Its liquidity is often sourced during periods of stress in the markets, one of its appealing qualities. Liquidity across the global OTC, futures, and ETF markets is examined below.

The Evolution of Gold Investors and the Role of ETFs

Gold-backed ETFs have expanded access to gold investments over the past 15 years. Previously, only large and sophisticated investors would invest directly in gold through futures markets. Gold ETFs now allow all types of investors, from individuals to large institutions, to easily and affordably invest in gold. For retail investors, especially those with smaller portfolios, gold ETFs provide a low-cost way to add diversification. The liquidity and accessibility of these funds also enables gold ownership through retirement accounts. On the institutional side, mutual funds, pension funds, endowments and other managers utilise gold ETFs for portfolio diversification, risk hedging, and wealth preservation. The funds facilitate large trades through deep liquidity and tight bid-ask spreads, reducing transaction costs. In summary, gold ETFs have democratised investing in gold by opening up this key asset class to all investor types and portfolio objectives.

What is The World Gold Council’s role in Gold ETFs?

The World Gold Council (WGC) is the market development organisation for the gold industry. Its purpose is to stimulate and sustain demand for gold, provide industry leadership, and serve as the authority on the gold market. 

The World Gold Council is a nonprofit association of the world's leading gold producers. As a market development organisation for the gold industry, the World Gold Council includes 33 members, many of which are gold mining companies. The WGC was established to promote the use of and demand for gold through marketing, research, and lobbying. Headquartered in London, the WGC covers the markets which comprise about three-quarters of the world's annual gold consumption.

The WGC is an advocate for gold consumption. It aims to maximise the industry's potential growth by monitoring and defending existing gold consumption while also co-sponsoring research into new uses and products containing gold. For example, successful projects supported by the gold industry have led to the development of jewellery containing 99% gold. The WGC's specific purpose is to stimulate and sustain demand for gold.

The WGC created the first gold ETF in partnership with State Street Global Advisors, the World Gold Council launched SPDR® Gold Shares (GLD) in 2004. Since then, more than 90 gold-backed ETFs have been launched around the world — including SPDR® Gold Mini Shares (GLDMSM), the low-cost complement to GLD.

How do I invest in Gold ETFs?

ETFs can be bought and sold like regular stocks. And providing the ETF is listed on an exchange to which a brokerage account has access, investors can quickly add these financial instruments to their personal portfolios.

The general steps involved when investing in a gold ETF:

1. Research and Select a Gold ETF: Look at different Gold ETF options available in the market. Consider factors such as the ETF’s objective, expense ratio, tracking error, liquidity, and assets under management. Select an ETF that aligns with your investment goals and preferences.
2. Open a Brokerage Account: Open an ETF trading account with a reputable and reliable ETF broker. Compare brokerage options based on fees, available investment products, trading platform features, and customer support. Many brokerage accounts are accessible using easy to use apps and have no minimum investment amount. 
3. Fund Your Account: Once your trading account is set up, fund it with the desired amount of capital you intend to invest in Gold ETFs. Ensure your account has sufficient capital to cover the investment and associated trading costs.
4. Place Your Trade: Using your broker’s trading platform, search for the specific Gold ETF you wish to invest in. You can use the Gold ETF ticker symbol for a quick search and indicate the number of shares or the amount you want to invest. Review the trade details and submit the order.
5. Monitor and Manage Your Investment: After investing in a Gold ETF, it’s essential to monitor its performance regularly. Stay informed about any news or developments related to the gold market and the specific ETF you have invested in. Consider setting up price alerts or notifications to stay updated on significant price movements.

Analysing a Gold ETF

When evaluating a gold ETF investment, focus on key performance metrics and fees. Analyse both recent returns over the past year as well as longer-term five-year returns to gauge consistency. Compare the ETF's performance not just to the gold price but to other similar gold ETFs. This allows you to assess if underperformance relates to the ETF structure itself or to broader gold market factors. Additionally, pay close attention to the ETF's expense ratio as this directly impacts net returns. Favour gold ETFs with lower expense ratios where possible. Keeping fees low allows more of your investment dollars to work for you over time. Evaluate all of these factors in total to determine if a specific gold ETF aligns with your investment objectives and risk tolerance.

Top 5 Gold ETFs 

With a wide range of options available, it's essential to identify the best performing gold ETFs for your investment goals. Trading View provides good analysis of some of the top gold ETFs to consider for investment based on factors like performance, expenses, liquidity and overall benefits.

The top 5 Gold ETFs based on 5 year performance are listed below. All returns sourced from Trading View  on 16/01/2024.

1. FT Vest Gold Strategy Target Income ETF (-4.53% 1Y / +1927.75% 5Y) 

IGLD is a fund that aims to provide steady income over time while also participating in some of the price growth of gold. It does this in a few key ways:

• It invests in short-term US treasuries and cash-like investments to generate base income. This makes up around 3.85% per year of the fund's target return.
• It uses call options on the SPDR Gold Trust ETF (GLD) to gain exposure to gold price moves. This means when gold prices rise, IGLD can benefit. It does not own the gold directly but gets the exposure through financial instruments.
• It utilises a strategy called covered call writing. This involves selling call options on a portion of its gold exposure to collect premiums from the buyers of those options. The premiums collected provide additional income for the fund.
• In exchange for the premiums collected, IGLD gives up some potential upside in gold price gains above the call option strike prices. So it participates partially in gains GLD makes rather than fully.

IGLD aims to provide consistent income from multiple sources - short-term bonds, cash investments, and options premiums. It also gets exposure to gold price moves, though somewhat capped through its options strategy. The fund does not provide buffers or protection against losses though - it fully participates if gold prices decline. 

Holdings in the IGLD portfolio consist of the US Treasury Bill, the SPDR Gold Trust C, the SPDR Gold Trust C and the SPDR Gold Trust P.

2. ProShares Ultra Gold (+2.38% 1Y / +62.19% 5Y)

UGL is an exchange-traded fund that aims to give you twice the daily returns of the price of gold. So when gold prices go up during the day, UGL is designed to go up twice as much. And when gold prices fall during the day, UGL is meant to go down twice as much. This makes UGL a bullish, or positive, bet on gold prices.

To do this, UGL uses leverage from derivatives and debt to amplify the movements in gold prices. The ETF tracks a futures index of gold prices published by Bloomberg. This index shows what the price of gold is for future delivery dates.

UGL is meant for short-term investors who only hold for a day. Since UGL doubly amplifies daily movements, holding longer can cause unexpected results as the daily changes compound. UGL drifts away from exactly 2x the gold price over longer periods.

Since UGL uses commodities futures and leverage, you can expect a K-1 tax form on any investment gains. So UGL is better suited for tax-advantaged accounts like IRAs rather than normal taxable accounts. 

Holdings in the UGL portfolio consist of Bloomberg Gold Subindex swap - Citibank NA, Gold 100 OZ FUTR Apr 24, Bloomberg Gold Subindex swap - UBS AG and Bloomberg Gold Subindex swap - Goldman Sachs.

3. GraniteShares Gold Trust Shares of Beneficial Interest (+6.42% 1Y / +55.77% 5Y)

BAR is a fund that allows you to invest in physical gold bars stored in a vault in London. The vault is managed by a large bank called ICBC Standard Bank which keeps the gold secure.

The fund is set up as a grantor trust. This means the trustees that run the fund cannot lend out the gold bars to anyone else. The gold bars are only for investors in BAR.

Since BAR owns actual gold bars, its value should closely match the price of gold in financial markets. So if the price of gold goes up or down, the value of BAR should do the same.

BAR provides very similar exposure to investing directly in gold as other large gold funds like GLD and IAU. Like all funds that hold physical gold, you may need to pay taxes on gains if you sell your investment in BAR after making money.

When comparing BAR to other gold funds, look at factors like who runs the fund, what bank stores the gold, where it is stored, and the total fees to buy and sell. These things can differ between funds and affect your total costs and security.

Holdings in the BAR portfolio consist of 100% LBMA gold Bars. Each bar is segregated, individually identified and allocated.

4. Goldman Sachs Physical Gold ETF Shares (+6.41% 1Y / +55.58% 5Y)

AAAU is an exchange-traded fund that allows investors to invest in physical gold. One share of AAAU represents 1/100th of an ounce of gold. This small denomination makes AAAU accessible for investors who want to invest limited amounts.

The price of AAAU closely tracks the daily price of gold as set by the London metals market. AAAU's structure protects investors because the actual gold bars are kept in a custody account and cannot be lent out.

However, taxes on long-term capital gains from AAAU can be high because it is considered a "collectible" investment by the IRS.

Originally, AAAU shareholders could exchange their shares directly for gold coins or bars. However, this feature was discontinued in December 2020 when Goldman Sachs acquired the fund.

In summary, AAAU offers a simple, low-cost way for beginner investors to gain exposure to the price of physical gold. The small share denomination facilitates smaller investments. But taxes can be high if shares are held long term.

Holdings in the AAAU portfolio consist of 100% gold bars.

5. SPDR Gold MiniShares Trust (+6.49% 1Y / +55.53% 5Y)

GLDM is another gold fund you can invest in, similar to the very large GLD fund run by State Street. There are two main differences between GLDM and GLD. First, GLDM holds less gold per share compared to GLD. This could be good if you want to make smaller investments, but may cost more in trading commissions if your broker charges per share. Second, GLDM may have lower annual fees than GLD, so compare the expense ratios. Also note that GLDM uses different companies to store and guard the physical gold. Like all funds holding physical gold, if you sell GLDM shares after holding for over a year you pay the collectibles tax rate which is higher than normal investment tax rates. Overall GLDM gives another option to invest in gold, with potential cost and investment size advantages over the very popular GLD fund.

Case Study: Sprott Gold Miners ETF

The Sprott Gold Miners ETF (SGDM) is an exchange traded fund that invests in gold mining companies. The goal of SGDM is to match the performance of an underlying index called the Solactive Gold Miners Custom Factors Index.

This index tracks the stocks of larger gold mining companies traded on Canadian and major US stock exchanges. The index chooses companies that have:

• High revenue growth - This means the gold miners are selling more gold over time
• Strong free cash flow - This means the miners have money left over after operating costs to invest back into growing their business
• Low debt levels - This means the gold miners are financially healthy

The index and SGDM portfolio are reconstituted quarterly to make sure they keep investing in the gold miners that score the highest on those key factors like growth, cash flow and low debt. By investing in SGDM, you get exposure to larger, financially healthier gold mining companies expected to grow faster than their peers.

Holdings in the SGDM portfolio are listed below:

Sprott ETFs provide investors with access to innovative and unique indexes that are designed to outperform passive market cap-weighted offerings. The Sprott Gold Miners ETF Holdings include many larger sized gold companies including:

• Barrick Gold Corp which is a sector-leading gold and copper producer with a portfolio spanning the world’s most prolific gold and copper districts and focused on high-margin, long-life assets.  Barrick Gold Corporation reported its third quarter 2023 financial results in November 2023, providing investors an update on the company's performance amid a turbulent macroeconomic environment. 
• Osisko Mining is a mineral exploration company focused on the acquisition, exploration, and development of gold resource properties in Canada. 
• Alamos Gold is a leading intermediate gold producer with operating mines in Canada and Mexico and a strong portfolio of growth projects. Headquartered in Toronto, Canada, Alamos has over 1,900 employees committed to sustainable mining practices and creating value for stakeholders. 
• Endeavour Mining is an intermediate gold producer focused on developing mines in West Africa. Endeavour operates 5 mines across Côte d’Ivoire, Burkina Faso and Senegal with an annual production of over 1 million ounces of gold. Endeavour Mining is positioned as one of the top 10 largest global gold producers, with a strategic focus on the prolific West African region where it has established a diversified portfolio of assets.
• K92 Mining is a Canada headquartered gold producer that owns the high-grade Kainantu Gold Mine in Eastern Highlands Province, Papua New Guinea. Since restarting operations in October 2016, K92 has delivered six consecutive years of production growth, achieving 123 koz AuEq in 2022. K92 Mining held its second quarter 2023 financial results conference call in August 2023. CEO John Lewins and CFO Justin Blanchet provided an overview of the company's operating and financial performance for the quarter, as well as an update on expansion projects underway at the Kainantu gold mine in Papua New Guinea.