Gold ETF

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 or simply hold large quantities of cash.  The gold in the name is 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 like the prospects of a fund manager they will change over time.  When you invest in GTU you are truly investing in gold.

Is the Price Worth it?
Currently the price of GTU is about 8 times earnings.  Normally I don’t like to buy any stock that has a price to earnings greater than what I perceive its annual growth to be.  If you believe that gold will grow greater than 8% per year over the next couple of years then this could be a great buy.  However, this Canadian gold ETF is so purely a gold purchase that I would have to factor in the main purpose of buying gold is as an inflation hedge and diversification from a all corporate equities portfolio.  So even if gold only grows 4% per year giving you a PEG (price / (earnings * growth)) of around 2.0 this is still a good buy to balance a portion of your retirement account.

Why a Canadian Stock ETF Versus Real Gold?
There are two main reasons I prefer a gold exchange traded fund to buying actual gold:

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 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.

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).