Since the start of civilization, gold has been sought after and prized by the rich. Egyptian pharaohs used gold to line their tombs. It’s been used as a currency for thousands of more years.
Today, not all investors see gold as a valuable asset. Some see it as a relic of the ancient past and only useful for jewelry or industrial use. Some are more into cryptocurrency, so read our bitcoin vs gold review. However, many still seek out gold because they view it as an asset that acts as a store of value. As a store of value, investors believe gold:
- hedges against inflation and deflation in the long-term
- maintains its value over the long-term
- diversifies portfolio holdings
For those that want to get their hands on some gold, there are three ways to do so:
- Buy physical gold
- Invest in gold miners
- Invest in a gold ETF (Exchange-Traded Fund)
There are added costs associated with owning large amounts of physical gold, not to mention the risk of theft. Mining stocks are notoriously volatile and call for research into individual companies to inform and maintain your investment decision. You would also have to keep up with news and financial events around the company. Maybe you should consider VOO vs VTI instead? Or SPY vs VOO, which you can find out more by clicking here.
Investing in gold ETFs is the simplest and most convenient way to buy and sell gold. Each ETF has ownership of a certain amount of physical gold bullion – which is gold bars. Gold ETFs are structured as trusts which means each share of a fund represents ownership of a portion of its gold reserve. Two of the most famous gold ETFs are compared side-by-side below.
Overview of Funds
Both iShares Gold Trust (IAU) and SPDR Gold Trust (GLD) track the performance of physical gold. As a result, they both have the same historical performance and fund composition. Comparing both ETFs, IAU has less gold in its fund while GLD has more than double that amount. The average daily volume for GLD is about 3.5x higher than that of IAU, indicating the higher amount of capital inflows and outflows from the fund. It also shows that GLD is more well known than IAU to the investing public. Below is an in-depth look at IAU and GLD and their differences.
What Are Differences Between IAU and GLD?
IAU is issued by BlackRock Fund Advisors, an investment advisory firm that is based out of San Francisco. It is the world’s largest asset manager with over $8.67 trillion in its custody. GLD is issued by State Street Advisors, the world’s fourth-largest asset manager based out of Boston, MA. State Street Advisors has $3.59 trillion in assets in its custody.
Both institutions are reputable, long-time players in the investment and asset management spaces.
The inception date for GLD is November 8, 2004, while IAU started on January 21, 2005. Both funds are only two months apart in age.
IAU has an average daily volume of $370.33 million, while GLD has an average daily volume of $1.31 billion. As mentioned above, the 3.5x difference in trading volume figures suggests that GLD is more popular with investors. It also points that GLD has a smaller bid-ask spread, which is the difference between the price point that buyers want to purchase the fund and the price point sellers are willing to sell fund shares. This means there is less margin given up from the buyer side, adding to its popularity.
Expense ratios represent the charges from the fund issuer to pay for the fund’s expenses. This includes management and portfolio allocation (how often the portfolio is rebalanced) expenses.
IAU’s expense ratio is 0.25%, while GLD’s is 0.40% – a difference of 1.6x.
- For every $10,000 you invest in IAU, you pay $25 in fees.
- For every $10,000 you invest in GLD, you pay $40 in fees.
According to financhill.com, GLD’s higher share prices offset the difference in expense ratios. Over the long term, GLD will see a better return on investment than IAU investors.
Comparing Expense Ratios with Other Asset ETFs
GLD and IAU have relatively low expense ratios but are considerably higher than other funds of different assets. For example, Vanguard’s S&P 500 ETF (VOO) charges a 0.03% expense ratio. So for every $10,000 you invest, you pay $3 in fees – much lower than fees from gold ETFs.
Spreads & Tracking Differences
A spread is a difference in price between the buy (ask) and sell (bid) prices. An exchange or broker will quote prices in a bid-ask spread.
SPDR Gold Shares and iShares Gold Trust have average spreads of $0.01. On a percentage basis, IAU’s spread is 0.06%, while GLD’s is 0.01%. The percentage basis measure is tagged to the share price of each gold ETF. IAU’s greater spread indicates that its fund shares are not traded as often as GLD’s – which shows up in the average daily trading volume figures. A larger spread helps to offset the risk of an asset that is experiencing low trading volume.
The difference in spread between these gold ETFs is very marginal and would realistically not impact an investor’s holdings. IAU’s lower share prices would offset the higher spreads.
The median tracking difference is the discrepancy between the ETF performance and the underlying asset it tracks – in this case, gold. IAU’s median tracking difference is -0.30%, while GLD’s is -0.49%. This measure highlights that both ETFs closely track the spot price of gold bullion, with IAU doing a slightly better job at it. Otherwise, there is no tangible difference in tracking gold’s spot price that should concern investors.
As of this article’s writing, neither fund issues a dividend.
Below is a comparison of each fund’s performance over the last 10 years.
Looking at the charts, IAU has a slight advantage in total return compared to the GLD. At the highest difference, it outperforms GLD by .16% – a marginal figure.
Both GLD and IAU track the spot price of gold, so their performances are completely tied to the appreciation of gold’s price and closely track one another’s price movements.
Is it Worth it to Invest in Gold?
Between both funds, we recommend IAU as the better investment. It has slightly higher performance, better median tracking difference, and lower expense fees. Overall, the differences between both funds are marginal and would only have minor effects on an ETF’s market performance.
As an asset, we recommend against investing in gold and instead invest in other assets such as equities or bonds. Equities and bonds have historically outperformed gold in the long term, according to Investopedia. Gold has had its moments as a hedge against volatility – outperforming other assets for short periods of time.
If you are an investor with a long time horizon, we recommend sticking with a mix of equities, bonds, and funds to maximize your returns and cushion against downside risks.
If you are an investor expecting high volatility or approaching retirement, holding gold as a temporary store of value may help you weather the storm.
Looking at the above chart, the 10-year return is 1.77% or 1.92%. Then, there are a few months to a few years where it outperforms other asset classes such as the stock market. For reference, inflation runs at about 2-3% annually, exceeding gold’s return over the same period when compounding is taken into effect. So an investor would lose value, making gold not too useful as a long-term store of value. It is more suitable in periods of high volatility, such as when the coronavirus first became global in 2020. In uncertain environments, gold can be a suitable short-term store of value. Investors should treat it as an actively managed asset and closely watch its performance and research economic conditions.
In the past, gold could have been a great asset to invest in. However, we have more dynamic asset classes available today that can both preserve and return more value than precious metal, thus creating the potential for higher returns.
Frequently Asked Questions
Q: How can I buy into a gold ETF?
A: Sign up and create an online account with a reputable brokerage such as Fidelity, E*Trade, or TD-Ameritrade. Your typical, full-service exchange will offer access to stocks, bonds, mutual funds, and ETFs.
Q: How can I study and research gold ETFs?
A: Full-service brokerages offer free research tools to examine years of market data on assets. Keep in mind the market data usually goes back at least 10 years.
Q: How would holding a gold ETF in the short term affect me?
A: The IRS defines short-term investment asholding an asset for less than 1 year. If you buy and sell your gold shares within a year, you will be taxed at your marginal income tax rate. This is your highest tax rate. The IRS incentivizes investors to hold assets for longer than a year, as there is a separate income tax scale that reduced rates.
Q: What price point should an investor buy into a gold ETF?
A: It depends on the individual and their time horizon for holding gold. There may be a risk of buying or selling based on market conditions.
Q: How does a precious metals ETF work?
A: On a high level, a precious metal ETF is intended to track the spot price for a given metal. This type of ETF gives an investor exposure to the performance of that precious metal, as the investor is placing a bet on its future. Each ETF holds the underlying precious metals that investors seek exposure to. Each share of the ETF represents a portion of ownership of the ETF’s holdings.