Gold ETF

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What are Gold ETF Funds?

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Investing in gold or other precious metals is very popular these days, but precious metals investing requires special attention to the logistics of the purchase.  Gold ETF funds provide a method for investing in gold that eliminates these issues. The logistics referred to are the problems of insurance, storage, moving, and reselling, along with many others. Here we will clarify what ETF gold funds are, and some of the better ways to trade them.

Firstly however, you should understand what the term ETF means. An ETF is an Exchange Traded Fund, meaning it is traded on the major stock exchanges.  The NYSE, and NASDAQ have ETF’s, but the American Stock Exchange (AMEX) is the primary trading venue for Gold ETF funds. When you buy an ETF, you are typically investing in a conglomerate of companies, rather than a single corporation.

It works like this, the Gold ETF fund will purchase a large amount of gold, maintaining the physical metal in storage. They will then issue shares in baskets, the idea here being that the value of the shares will increase with the price of gold bullion. If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.

What makes this attractive to most buyers is the fact that trading in gold can be done very easily at any time during stock market hours using your online brokerage account. Another thing people like is you don’t have to buy a large amount of gold to invest. Most gold ETF funds have a minimum investment but you can buy in portions of an ounce.  This is really ideal since the price of an ounce of gold these days is not something everyone can afford to purchase.

Some of the more popular venues for buying gold or gold mining companies include the SPDR Gold Trust (GLD), Market Vectors Gold Miners ETF (GDX), and ProShares Ultra Gold (UGL).  Here’s a brief explanation of how these funds work:

SPDR Gold Trust (GLD) was the very first Gold ETF fund and still the most popular. They purchase 400 ounce gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold.

ProShares Ultra Gold (UGL) is for the seasoned investor who is very aggressive and not averse to risk.  Also known as a double gold ETF, it is designed to double the investment return, in other words, if the price of gold increases by 10% the value of the shares should increase by 20%.

Market Vectors Gold Miners fund (GDX) attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it.  Keep in mind, this type of Gold ETF is made of up gold company stocks, thus it tracks the gold stock index, not the gold price index.

Why Follow a Professional?

Now though I’ve provided a good basic overview of Gold ETF funds, if you’re really serious about gold investing I highly recommend you sign up for a reputable gold ETF newsletter with trading alerts. Without the guidance of a professional who specializes in trading gold securities, you’d not only be losing out on a lot of profits but taking on unnecessary risk at the same time.

One of the best gold newsletter and trading alert services out there is TheGoldAndOilGuy. TheGoldandOilGuy is run by Chris Vermeulen, a professional gold and stock trader with a very impressive track record.  Chris is without a doubt one of the best gold ETF traders I know of and what I especially like about his service is that not only does he provide highly profitable trading signals in real time but his whole approach is actually very conservative in nature with limiting your risk being a top priority.

But be warned – if you’re the type of person who has a difficult time following instructions and instead trades on their emotions then please do NOT sign up for this newsletter as you’d only be wasting your time and money.  However if you can exercise discipline and execute trades according to Chris’ calls, you’ll likely be shocked by the consistent gains you can achieve.

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Why the Best Oil ETF is an Energy ETF

With the dramatic rise (and fall) in crude oil prices these past several years, just like gold, many investors are looking to profit from these price movements, mainly through the use of oil ETFs, energy ETFs, and other popular investment vehicles such as oil futures.

Investing in Oil vs. Gold

Gold and oil do have some similarities: They are both commodities priced in USD, they are both recognized as significant to our global economy, and there is a finite amount of each resource available on this earth. Beyond that however, there really isn’t much else as far as similarities go. Oil really isn’t “black gold” as it’s often coined and infact reacts very differently to market conditions. Gold and oil indexes do not follow one another in the markets and will often end up going in opposite directions depending on global events. Many investors are often surprised by this but they shouldn’t be. Why? Because gold is money, a global currency, one that serves as a safe haven from government mismanagement, whereas oil is just a commodity.

Now there are a variety of factors that affect either of these commodities but generally with oil, oil supply and the global economy have the most significant impacts on its current price. In simple terms, a tight supply with a booming economy should normally equate to a rise in price.

Where Are Oil Prices Headed?
No question about it, oil in general has risen significantly over the years though it has receded somewhat due to a threatened global economy. It certainly hasn’t been a straight ride up in price – in fact looking at a 5-year oil chart shows many peaks and valleys but the point is we will likely never again see $40USD oil again. Why? Supply mainly. The peak in global oil production (i.e. peak oil) is soon coming and some believe is already upon us. Presently the economy is looking pretty grim at the moment which is having a significant dampening affect on oil prices but as the economy starts to recover I expect the oil price to shoot up again past even it’s current high. In other words, oil is only going to get more expensive; it’s just a matter of time.

Best Oil ETF

As my post title eluded to, I believe the best oil ETF is actually an energy ETF (more on that later) however if you’re looking for purely an oil fund there are are couple you should consider. Like other types of ETF’s, Oil ETFs come in a variety of flavors but really there are two basic types: crude oil ETFs and oil stock ETFs.

The most noteworthy crude oil ETF is probably the United State Oil Fund (USO) which trades around 10 million units per day and possesses $2 billion in assets. If you’re only interested in trading the commodity, this is probably your best bet but I caution you that because of the ongoing issue of contango, only short-term trades should be considered.

Another strong contender for the best oil ETF pick is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). This oil stock ETF seeks to track the performance of the S&P Oil & Gas Exploration & Production Select Industry Index and has a very low expense ratio of 0.35%. It is also very liquid with an average trading volume of 10 million shares.

Leveraged Oil ETFs

Similar to gold ETFs, there are leveraged oil ETFs that allow an investor to either short (bet on oil going down), double short or go double long on their investment. Please note however that due to the arithmetic of daily compounding, holding leveraged funds of any kind will eventually annihilate your portfolio over the long term. Thus, leveraged ETFs should only really be considered for very short term holds (i.e. 1 trading day)

Short Oil ETFs (-1x)
A short oil ETF allows an investor to profit from the price of oil going down. A few of the most popular ETFs include:

DDG – The ProShares Short Oil & Gas ETF shares correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index.

SZO – The PowerShares DB Crude Oil Short ETN is based on a return version of the Deutsche Bank Liquid Commodity Index-Oil which seeks to inversely follow the underlying futures contracts from a basket of oil future contracts.

Double Short Oil ETFs (-2x)
A double short oil ETF allows the investor to profit from oil price declines, only doubly so.

SCO – The ProShares UltraShort DJ-UBS Crude Oil is a double short Oil ETF which seeks daily results that correspond to twice (200%) the inverse of the daily performance of The Dow Jones UBS Crude Oil Subindex.

DTO – The PowerShares DB Crude Oil Double Short ETN is based on a total return version of the Deutsche Bank Liquid Commodity Index-Oil, which seeks to achieve a double inverse result of the underlying futures contracts from a basket of oil future contracts.

Double Oil ETFs (2x)
A double oil ETF enables an investor to leverage themselves to gain double the effective return of a rise in oil prices.

UCO – ProShares Ultra DJ-UBS Crude Oil ETF seeks daily investment results that correspond to twice (200%) the daily performance of the Dow Jones UBS Crude Oil Subindex.

FOL – FactorShares 2X Oil Bull/S&P500 Bear is a fairly new double oil ETF that seeks to track approximately +200% of the daily return of the S&P Crude Oil – Equity Spread Total Return Index.

Why I Prefer an Energy ETF (Long Term)

Now as popular as crude oil ETFs are and as promising as future oil prices look, over the long run oil ETFs are not favorable in my opinion. Firstly, these ETFs are not all that effective in tracking the prices of the crude oil all that well. The main reason for this is that these ETFs invest primarily in oil futures making them especially susceptible to pricing anomalies in the oil futures markets. On top of that, the effects of contango has over time, disabled the oil ETF from fully keeping up with crude oil prices. Contango is essentially a market condition where commodity prices are typically higher on long term futures versus short-term futures contracts.

Another issue with Oil ETFs over the longer term is that they, well, track crude oil, and only oil. What’s wrong with that you say? Nothing really, for now anyway, but the longer the time frame, the more it is evident that oil is not a sustainable energy source. There is a finite amount of it in the ground and once that’s gone, well that’s it. I’m not necessarily saying this will happen in the near future but we are already near or at peak oil so it’s probably not as far off as you might think.

As such, I much prefer an energy ETF. A good energy stock ETF will not only contain oil stocks but a group of alternative energy stocks and commodities such as natural gas, solar energy, nuclear energy, wind energy, hydro power, and geothermal energy. These types of energy along with other power sources we have not yet even discovered are the future, not oil. So if you want a long term hold in this sector, select a top energy ETF and hold it. Some of the best energy ETFs I can recommend include:

IXC – iShares S&P Global Energy Sector Index Fund is an energy ETF fund that seeks to follow the performance of the Standard & Poor’s energy sector represented by the S&P Global 1200 Energy Sector Index.

XLE – Energy Select Sector SPDR Fund seeks to match the returns of the Energy Select Sector Index (index ticker: IXE). The expense ratio is a mere 0.20%

XEG:TSX – The iShares CDN Energy Sector Index Fund is a Canadian Oil/Energy ETF traded on the Toronto Stock Exchange that seeks to track the S&P/TSX Capped Energy Index. Personally I love Canadian ETFs and if you’re trading in CDN currency already, there’s little reason not to own this one.

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Gold ETF – Canada

If you’re looking for a purely Canadian Gold ETF, Canada has one you may wish to consider; Central Gold Trust (GTU on the New York Stock Exchange or GTU.U on the Toronto Stock Exchange, TSX.)   Though technically a closed end fund (CEF), it trades on the stock market just like an ETF and the big advantage to the Central Gold Trust is that it’s a pure gold play, meaning its primary holding is gold.  As of the beginning of 2010 GTU’s assets consisted of 97% gold bullion, 1.5% gold certificates, and 1.5% cash for basic working capital.  While this seems like it should be obvious many named gold funds actually trade through many other precious metals, gold futures, or simply hold large quantities of cash.  The gold in the name is likely used to attract less sophisticated investors.

While some gold funds may be able to perform better, it is more difficult to determine how the fund intends on making money without understanding the fund manager who is employed at the time.   Even if you like the prospects of a fund manager they will change over time forcing you to keep up-to-date with who’s currently managing the fund.  When you invest in GTU you are truly investing in gold.

Why a Canadian Stock ETF Versus Real Gold?
I like owning both but there are two main reasons I prefer a gold exchange traded fund like GTU over buying actual gold:

Tax Efficiency – Gold ETFs are taxed more efficiently than holding gold bullion so come TurboTax time, you’ll be much happier with the ETF in your portfolio vs. the yellow metal. The reason for is that gold ETFs are considered a long term investment, and thus taxed at a lower rate, if held for 1 year. Gold bullion on the other hand must be held for at least 3 years to be considered a long term investment and reap the lower tax benefit.

Liquidity – The reason you invest is to convert your investments into goods in the future.  Sometimes a trip to Hawaii is just nicer than a hunk of metal.  When you purchase physical gold and keep it yourself you have to find a broker to convert the gold back into cash.  This involves an appraisal, shipping, driving, phone calls, or other general nuisances getting between you and your money.  An ETF is traded over a major stock exchange through your normal stock broker.  A sell order will be transacted in moments with your cash virtually instantly available.

Reasonable Spread – The spread is the most ignored fee in investing.  The spread is the difference between what the market makers are selling an equity for versus what they are buying them for. The spread on stocks is about 1% of the purchase price. This means the gold ETF needs to earn 1% before you earn a penny.  Owning gold has a carrying cost of around 7%. If you don’t plan on holding gold for a length of time this 6% difference can bite into your earnings.

Is the High Price of GTU Worth it?
There is little doubt that in the long term the SPDR Gold Trust (GLD) will likely outperform GTU as you are paying a slight premium to owning GTU. So why invest in GTU at all? Well firstly if you’re Canadian it’s convenient that the fund is priced in both CDN via the TSX and USD via the NYSE allowing you to hold the ETF in your RRSP without incurring foreign exchange fees. However the main benefit of GTU over other ETFs (including GLD) is that unlike other funds, Central Gold Trust does not lease out your gold. Instead they always keep at least 95% of their holdings in insured and fully segregated physical gold. So as far as safety is concerned it doesn’t come much better than this other than storing your own physical gold in safety deposit box of course, which isn’t a bad idea in itself.

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Gold ETF – India

When looking to international markets for a gold ETF, India would often be first on your list.  Why is that?  Simply, India has probably the largest fascination with gold than any other country in the world and is by far the world’s largest buyer of gold, accounting for 9.5 percent of the world’s total gold holdings.  More impressive is the fact that current demand from India alone consumes 25% of the world’s annual gold output.

Gold is viewed in India as a symbol of power and wealth.  However more so nowadays, the people of India buy gold as a hedge of protection from their own rupee currency and government mismanagement.  Gold is highly valued so much so that it’s not uncommon for an Indian to use their gold jewelry as collateral for a loan.

It’s no wonder then why India is often associated with gold and why investors would expect a gold ETF in India to be an investment worth considering.  Fortunately India doesn’t disappoint as there are currently 6 gold ETFs India has to offer, all of which are traded on the National Stock exchange (NSE).

Now before I get into the specifics of these ETFs, I should mention that if you are a US investor and wish to buy a gold ETF for gold exposure, there’s really no compelling reason to own an Indian gold ETF over an American one unless of course you believe the Indian rupee will continue to devaluate at its current pace which has made Indian gold ETFs quite attractive over the past few years.  Long term however, I would personally stick with the most popular ETF gold fund; the SPDR Gold Trust (NYSE:GLD).  The GLD has a very large trading volume making it liquid enough for most investors coupled with a low expense ratio (0.6%).  Indian gold ETFs on the other hand have typically higher expense ratios ranging from 1% up to 2.5%!  Not to say Indian ETF funds are a bad choice; they just wouldn’t necessarily by the first choice for someone living in the US.  If you happen to live in India however, they are definitely worth considering as an alternative to owning physical gold.

Here are the 6 gold ETFs available in India:

  1. SBI Gold ETF (SBIGETS.NS) – The State Bank of India’s gold ETF is the newest addition to India’s market.
  2. Gold Benchmark ETF (GOLDBEES.NS) – The most popular and considered by many as the best gold ETF in India.
  3. UTI Gold ETF (GOLDSHARE.NS)
  4. Kotak Gold ETF (KOTAKGOLD.NS)
  5. Reliance Gold ETF (RELGOLD.NS)
  6. Quantum Gold ETF (QGOLDHALF.NS)

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A Short Gold ETF For the Bears

For some gold bugs it’s hard to imagine buying a short gold ETF, especially with such a strong gold market these past few years.  Though it’s difficult right now to see a need for an inverse gold ETF, remember not that long ago gold was not a strong performer to say the least.

Now I’m not saying that gold is about to take a nose dive into bear market territory but it has been on a tear lately and could be due for a correction of some kind.  You know the saying, “what goes up must come down”.  Well that’s not always true in the investing world but like all common sayings there is “some” truth to it.  No investment goes up all the time and though it seems the gold price is trending up long term, it still can come down a number of times as it corrects in price from over exuberance in the gold market.  It is at these times where short gold ETF funds can be become a profitable tool so long as they’re utilized correctly, which comes with experience and technical analysis skills.

Gold is money and because the fiat currencies are being devalued, in particular the USD, gold continues to gain value as a hedge against the risk of government mismanagement and over spending.  Gold has and always will have value and during times of uncertainty, investors and people in general, snatch up what they consider to have value, especially gold.  This is one of the reasons why gold has been doing so well lately.  All the turmoil, uncertainty and fear throughout the global markets has served as the primary catalyst for gold’s rapid rise in value.

Having said all this, eventually after all this turmoil is behind us, gold will begin to level off over the long term and may even decline just as rapidly as it had gained.  Gold will always hold value but it’s a commodity like anything else and at the end of the day its value is determined by supply and demand.  So if gold starts its decline, you’ll want to take advantage of this, just as you hopefully did on its way up.  The best way to profit from a decline in gold is to buy an inverse gold ETF or ETN.  Since they are exchange traded funds they can easily be bought and sold freely on the stock market making them ideal for short term trades.

The following is a list of the most commonly traded short gold ETFs on the major stock markets:

Short Gold ETF (GB: SBUL) – Traded on the (LSE) London Stock Exchange the SBUL short gold ETF trades inversely to the current gold price.

DB Gold Short ETN (DGZ) – The DGZ is an ETN traded on the NYSE that is also priced inversely to the gold price so if gold goes down 1%, DGZ will go up 1%.

DB Gold Double Short ETN (DZZ) – Similar to the DGZ, except that it is leveraged 100%, and thus trades at double the inverse of gold.  This gold short ETN can be thus be very profitable if you’re on the right side of the trade.

ProShares UltraShort Gold ETF (GLL) -  This double short gold ETF also trades at twice the inverse of current gold prices, only it is an ETF (vs. ETN).

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Leveraging With a Double Gold ETF

A double gold ETF is a leveraged ETF that moves up and down with the price of gold, only doubly so.  In other words, if the price of gold goes up 10%, a double gold ETF will go up  20%.  Conversely if the price of gold drops 10%, a 2x gold ETF will drop 20% in value.

The attraction for these types of leveraged gold ETFs especially the double long gold ETF has been increasing over the past few years as investors have watched the gold price skyrocket.  If you are convinced that the price of gold’s general direction is going to be upward, why not be doubly rewarded as it climbs?  Well unfortunately, like most things it’s not really all that cut and dry.  Yes, you can drastically increase your yield by investing in a double gold ETF but if you are wrong, even in the short-term, do you have the fortitude to watch the price of gold tumble along with your invested funds?  The gold price may come back again and even surpass your projected price, but if you do not have enough conviction of this, you may end up selling for a big loss.

Thus, due to the already extremely volatile nature of the price of gold, gold double ETFs should only be reserved for the most seasoned investor who is not averse to risk and is only risking a small portion of their overall investment portfolio.

Having said that, a lot of investors have been handsomely rewarded for being invested in a double gold fund these past few years and many gold bugs would argue that gold still has a ways to go before it begins to cool off.

If you are one of those investors whose willing to take on the extra risk, you can either invest in a gold ETF or gold ETN.  A gold ETN (exchange traded note) is similar to an ETF except that investors hold the debt security until it matures, at which point the issuer will give you the principal amount. Essentially ETN’s have the properties of both an ETF and a bond.

Here are the four main double gold ETF & ETNs to buy:

PowerShares DB Gold Double Long ETN (DGP) will move at the double the gold price and is meant for long gold investments.

PowerShares DB Gold Double Short ETN (DZZ) is the exact opposite of DGP in that it will move at double the price of gold yet in the opposite direction.  So if you think gold is going to drop, it’s a perfect investment vehicle for short gold plays.

ProShares Ultra Gold (UGL) ETF will move at double the price of gold and is meant for investors who are long on the gold price.

ProShares Ultra Short Gold (GLL) ETF moves at double the price of gold in the opposite direction, thus ideal for those short on gold.

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Best Gold ETF to Buy

So what is the best gold ETF to buy that will yield the highest returns possible in a gold bull market?  Do I have a personal favorite ETF gold fund?  Yes actually I do, but before I get too far into which ETF I think is best overall, it’s important to distinguish first what is meant by a Gold ETF as some investors interpret this differently than others.  Essentially there are two different types of Gold ETFs, one is an exchange traded fund that tracks the price of gold, with each share worth 10% of the gold price.  If referring to this type of ETF, I like the SPDR Gold Trust ETF (GLD), mainly because it has the highest average daily volume, and thus greater overall liquidity which allows me to trade the stock much more easily on the market.

The other type of Gold ETF, which is the one I want to focus on for this post is an ETF that contains gold stocks and securities sometimes known as a Gold Stocks ETF.  This type of ETF is obviously very different than one that simply tracks the price of gold.  As such, a gold stocks ETF though influenced by the price of gold, will not directly follow it since you are investing in gold companies and not the price of gold.

So what is the best ETF to buy in terms of those compiled of stocks?  Well, I’m going to cheat here and say that I like two; one that trades on the Canadian market and the other on the US Market.  The Canadian gold ETF I like is iShares CDN Gold Sector Index (XGD.TO).  Traded on the TSX (Toronto Stock Exchange) this gold stocks ETF contains some of the best gold and mining companies in the world including large cap names such as Barrick Gold, Goldcorp, Newmont Mining, Anglogold, Kinross gold, and gold fields.  It also contains some very high growth small cap gold stocks including Aurizon Mines, and Red Back Mining.  Also, with this ETF being priced in Canadian dollars, some might argue you are better protected from a weakening US dollar.  In actuality though, it’s really more of a convenience factor. If you have a Canadian brokerage account, you more than likely want to keep your funds in Canadian currency, particularly for an RRSP account.

The other Gold ETF to buy on the US market is the Market Vectors Gold Miners ETF (NYSE: GDX).  Traded on the New York Stock exchange, it is a very similar exchange traded fund to XGD but actually contains 30 holdings compared to the XGD’s 19, so you actually get a broader exposure to the precious metals sector.

Remember though, you don’t have to buy what I like, in fact it doesn’t really matter in the end which particular ETF gold fund you choose so as long as it has sufficient exposure to the gold sector, has had good past performance (meets or exceeds the gold index), and has a relatively low management expense ratio (MER).

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Gold Bullion ETF vs. Physical Gold Bullion

Many investors buy a gold bullion ETF to capitalize on gold’s price movements.  So what is a gold ETF vs. bullion and how does buying an ETF differ from actually buying physical gold?

A gold bullion ETF is simply an exchange traded fund that tracks the price of physical gold.  If the price of gold goes up 10%, the ETF will go up the same proportion and if the gold price goes down 10%, again the ETF will follow. Each ETF share normally represents one-tenth of an ounce of gold bullion.

Now before deciding to buy a physical gold ETF, there are a few things you should know about them.  Firstly, like all ETFs there is a MER (management expense ratio) involved to cover the costs of managing the fund.  Luckily however the fee is typically very low (~0.4%) compared to other types of funds.

Another key point about an ETF gold bullion share is that unlike buying physical gold coins or bars, you don’t actually own physical gold by owning a gold ETF share.  Yes, you own shares in gold, but not the gold itself.  Is that a problem?  Well yes and no.  It’s not a problem at all if all you’re wanting to do is profit from price movements in gold.  In fact buying a physical gold ETF is perfect for capitalizing on gold price movements since like all ETFs, it’s simply a stock traded on a major stock exchange which can be bought and sold easily.  However, if your primary reason for buying gold is to hedge yourself from a large wide-scale monetary crises, you would be wise to consider buying physical gold bullion rather than the ETF, or at least in addition to it.

The reason I say this is because if there was a large scale monetary crises in the US, let alone worldwide, it’s very possible the banking institutions that are controlling these Gold Bullion ETFs could become bankrupt or insolvent.  As a result they would likely end up liquidating the ETF and you would end up with no gold bullion and very little cash for your shares, if any.

Now I’m not saying this is likely to happen, but if you’re a gold bug, you have to consider why you are wanting to own gold and I’m sure one of the main reasons is to hedge your risk from fiat currencies.

So now that you understand the distinction between owning gold bullion and owning a gold ETF, here are the main gold bullion ETFs available on the market:

StreetTRACKS SPDR Gold Trust (NYSE: GLD) – By far the most liquid gold ETF available on the US market.

iShares COMEX Gold Trust (NYSE: IAU) – Another good alternative gold ETF investment vehicle.

ETFS Physical Swiss Gold Shares (NYSE: SGOL) – A newly launched (Sept, 2009) gold ETF that distinguishes itself from the others by holding it’s physical gold in Switzerland.

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