The smart way to buy gold ETFs

  • By Crystal Kim,
  • Barron's
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In Gold We Trust appears to be the sentiment of the moment. Flows into gold funds have been rising since December as dulcet tones from the Federal Reserve stifled concerns about another year of multiple interest-rate hikes and a stronger dollar. If recent price action is signaling what's to come, gold bugs could have a better year in 2019 than 2018.

Gold spot prices popped on Feb. 19, taking gold and gold-mining exchange-traded funds with it. Gold futures jumped on Tuesday to above $1,340 per troy ounce, a level it hadn't reached in nine months. The biggest bullion-backed gold ETFs, the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU), had similar gains. Trading volume on the VanEck Vectors Gold Miners ETF (GDX) rose to a two-month high—more than 90 million shares changed hands. And it saw more action than any other U.S.-listed ETF that day.

"Despite what the headlines are saying, [the recent action] is not a flight to a safe haven, but more like a stroll to a safe haven," says Christopher Louney, a commodity strategist at RBC Capital Markets. Investors aren't panicked, but global growth concerns and unresolved trade issues are opening the door for gold investments, he says. Louney's average annual price target of $1,338 for gold would suggest there's room to run.

The efficacy of using gold as a hedge is debatable, but there are good practices to follow when investing in gold- and gold-related products.

First, go cheap. In a fight for investors' dollars, issuers have been slashing fees on gold funds. The $34 billion SPDR Gold Shares is the biggest and oldest, but with a price tag of 0.4%, or about $40 for every $10,000 invested per year, it is not the cheapest. The second-largest, the $13 billion iShares Gold Trust, charges 0.25%, or $25 per $10,000 invested. Otherwise, they are nearly identical—both store bullion in vaults in London and don't offer investors the ability to redeem ETF shares for gold bars. If liquidity is not a concern, the $464 million GraniteShares Gold Trust (BAR) provides similar exposure and charges 0.17%.

State Street Global Advisors partnered with the World Gold Council to launch a cheaper version of its older brother, the SPDR Gold MiniShares Trust (GLDM), last year. It's just like Gold Shares, but with a smaller dose of gold exposure. One share of Gold Shares at launch was the equivalent of a 10th of an ounce of gold, while the Gold MiniShares at its June launch was pegged at one one-hundredth of an ounce. The mini-version charges 0.18%, a fraction of the Gold Shares' price tag. However, there's some sacrifice in terms of liquidity.

Second, watch the gold rush. A stampede into gold and related investments in 2017 created capacity issues for VanEck Vectors Junior Gold Miners ETF (GDXJ), a concentrated small-cap stock portfolio, and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG), a leveraged version of the strategy. The VanEck ETF had to start buying stocks not included in the index, then changed the index criteria to expand stock inclusion, dramatically changing the portfolio. The leveraged Direxion ETF temporarily suspended unit creation, causing it to trade at a significant premium to its net asset value because of the outsize demand.

Third, consider tax implications. The biggest gold ETFs are structured as trusts and taxed at a collectibles rate of 28%—compare that with the lowest capital gains rate of 15%. That's something to consider before pulling money out of, say, your bond allocation to park it in a gold investment trust.

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