Among the many gold ETP choices, there are two methodologies that stand out as the clear favorites: futures-based and physical-based. While both of these strategies have grown in popularity, they both come with a very different set of risks and returns that make them appropriate for some investors and a bad choice for others. Many debate over which strategy is better, but the fact remains that neither strategy is necessarily better than the other, but rather, one strategy will likely fit better with certain kinds of investors over the other.

Below, we break down the ins and outs of futures-based and physical-based gold ETPs to allow investors to decide which side of the line they fall on, and which choices would be most beneficial for adding necessary commodity exposure to an individual portfolio [see also The Ultimate Guide To Gold Investing].

Futures-Based Gold ETPs

Futures-based gold investing can vary in a number of different aspects of the portfolio maintained, but the overarching theme of this investment segment is delivering returns by investing in futures contracts on a specified commodity; in this case, gold. This style of fund will afford investors with a wealth of opportunities. For starters, one does not have to own a futures account to own a futures-based gold product; you only need to own the singular ticker of any of these respective exchange traded products. Second, trading futures contracts can be very difficult, and quite frankly, is not meant for the average investor. Futures ETPs take away the complexities by doing the tough work for investors, who can simply buy into a fund and enjoy instant exposure to futures-contracts on gold. And still, for all of its advantages, futures-based investing has a fair amount of backlash.

The most pressing issue of a futures-based products comes in the form of contango; a process where front month futures contracts are more expensive as time goes on, creating a loss of value when the ETF automatically sells the current contract and purchases the next month’s contract. Over time, contango can kill a significant amount of value in a single investment. This process can work to an investors advantage when front month futures are cheaper, adding value in the roll process between contracts. This is known as backwardation. Some funds have taken active strides to avoid contango with unique buying and selling techniques, but the fact remains that investors must be fully aware of the futures curve when buying into one of these ETPs [see also Eight Legendary Gold Investors].

Due to its shortcomings, futures-based products are not meant for the average “buy-and-hold” investor, but rather are meant to be used by only those who fully appreciate their complexities and can trade them appropriately. For those who do understand them, these can be powerful trading tools that offer an investment methodology that is unmatched in the financial world. Below, we outline two of the most popular futures-based ETP options.

• PowerShares DB Gold Fund (DGL): This product tracks a benchmark that is composed of futures contracts on gold and is intended to reflect the performance of the precious metal.

• E-TRACS UBS Bloomberg CMCI Gold ETN (UBG): This ETN differs its strategy from DGL by investing in futures contracts that are diversified across five constant maturities from three months up to three years. This may help alleviate contango concerns or simply fit better for investors looking to spread out their risks, as UBG is a better diversified product than DGL, though it will not reflect the changes in front-month futures as well as its competitor.

Physical-Based Gold

Prior to ETFs, the only way to physically own a metal was to simply go out and buy it, and run the risk of holding onto it yourself. But as the exchange traded world has beefed up its offerings, physical-based investing took a ride on the fast track to popularity, as investors can now own gold without shelling out the high costs for a couple measly ounces. Physical-based investing takes a different approach to gold allocation. Rather than owning futures contracts, these products seek to physically hold gold in vaults all around the world, nixing a lot of the issues that the aforementioned products exhibit. Owning physical gold gets rid of issues like contango, and allows for investors to keep their gains at a low cost. But while physical based investing avoids the major issues of futures-funds, it has its own problems to deal with [see also 50 Excellent Tools, Resources, and Blogs For Gold Bugs].

Allocation. When it comes to physical investing, it is important to note that a share of one of these ETFs represents a grantor who owns the physical gold bullion. Some funds exhibit 100% allocation, a process whereby the ownership of new gold is transferred from the custodian to the trust, reflecting in the holdings of the investor. Unfortunately, this process does not always go smoothly, and can lead to unallocated gold, which occurs when the custodian fails to deliver the specified amount of gold to the trust, or simply does not make the delivery on time. This creates unallocated gold, which can cause issues for individual investors [see also IAU vs. GLD]. While these issues seldom occur, as most funds have near 100% allocation, it is still an issue that investors should be privy to prior to purchase.

The simplicity of these products makes them ideal for a risk-averse investor looking for a long term play on gold. While these are still useful products for complex traders, they are most practical for the more hands-off investor. Below, we outline two of the most popular physical-based ETF options.

• SPDR Gold Trust (GLD): By far the most popular gold ETF in the world, GLD offers physical exposure to this precious metal as well as supreme liquidity: the fund changes hands an average of just under 15 million times per day. GLD’s share price is designed to represent roughly 1/10th the price of an ounce of gold and has an allocation that is slightly under 100%, which may be a cause for concern for some investors. GLD charges an expense ratio of 0.40%.

• iShares COMEX Gold Trust (IAU): IAU seeks to directly compete with GLD by offering a cheaper price (representing approximately 1/100th an ounce of gold) as well as expenses that are 15 basis point cheaper. IAU is able to boast 100% allocation and has gained 4.2% thus far in 2011.

In addition to these funds, ETF Securities offers a pair of physically-backed ETFs that store gold in some exotic locations:

• Physical Swiss Gold Shares (SGOL)
• Physical Asian Gold Shares (AGOL)

While the exact location of the vault doesn’t have a meaningful impact on the returns realized, some may be more comfortable with knowing that their bullion is outside of the U.S. or London (AGOL’s gold is vaulted in Singapore). While that may sound cooky, this exposure is available at a reasonable price; both of these funds are actually cheaper than GLD, and only slightly more expensive than IAU.

Disclosure: No positions at time of writing.

Some investors are hesitant to hold gold because of uneasiness over concentrating wealth in an asset that will never make a dividend or coupon payment. Exposure to the metal through the stocks of companies engaged in the discovery, extraction, and production may be an intriguing alternative. Just like any other company, the profitability of gold miners–and therefore the value of their stock–depends on the market price for their goods and services. In other words, a general relationship should hold: when gold prices go up, so too do the prospects for the companies that get the metal out of the ground. As such, gold miners often trade as leveraged plays on spot gold prices, allowing investors to achieve indirect access to an asset class that has delivered some huge returns in recent years.

The Global X Pure Gold Miners ETF (GGGG) is a relatively new product that offers an interesting alternative to one of the most popular ETFs in the world. The investment thesis behind GGGG is relatively straightforward; positions in gold mining stocks may allow investors to achieve indirect exposure to the precious metal while avoiding some of the potential pitfalls that make some nervous about physically-backed or futures-based gold strategies.

Under The Hood

We view GGGG as an alternative to the Market Vectors Gold Miners ETF (GDX), one of the largest ETFs in the world with assets of about $7 billion. But while GGGG is perhaps an alternative to the ultra-popular GDX, it should be noted that these funds are far from identical–even if there are similarities in the names of the products. While there is some overlap between the two portfolios, the differences are both significant and numerous. Perhaps the most important element of GGGG is the strict membership requirements for inclusion in the underlying index; companies must generate the vast majority of their earnings from gold mining in order to be included. Perhaps somewhat surprisingly, that distinguishes this product from GDX, which includes several stocks whose operations revolve around silver mining.

For example, Silver Wheaton is one of the largest individual components of GDX. And a number of other firms that make up that portfolio also have limited gold-centric operations: Pan American Silver Corp. and Silver Standard Resources are also included in the portfolio. And while the majority of companies that make up the GDX portfolio generate the majority of their revenues from gold, most of them also maintain material operations that revolve around other metals–both precious and industrial.

Pure Miner Difference

Gold and silver often exhibit strong correlations, but certainly are not interchangeable. Some of the price drivers behind these two precious metals are definitely unique, and the mix of exposure to these assets through mining stocks will definitely have an impact on the bottom line risk/return profile realized. GDX relied on gold for the majority of its indirect precious metals exposure through the mining stocks held, but silver makes up a meaningful portion of the portfolio as well. GGGG, on the other hand, consists almost exclusively of gold exposure. For different investors, of course, different strategies may make sense. Those who prefer some diversification among the underlying metals may gravitate to GDX, or even PSAU. But for those looking to isolate gold exposure with their mining stock portfolio, GGGG is the clear winner.

The focus on only pure play gold miners also has some other interesting ramifications on the GGGG portfolio. Compared to GDX, the allocations to small and mid cap companies is considerably greater. That impacts the risk/return profile as well; GGGG doesn’t have much in the way of exposure to diversified mining giants, focusing instead on smaller firms with gold-centric operations.

As far as the portfolio itself, GGGG is similar to many other targeted sub sector-specific ETFs; there is a relatively shallow basket of underlying securities and significant concentration. About 30 stocks in total make up GGGG, with ten of those accounting for about half of total assets. Though no one name makes up more than about 6% of assets, the portfolio is clearly top heavy and subject to outsized impact by movements in a small handful of stocks.

Pros

The biggest advantages of GGGG come in the unique methodology used to construct the underlying index. The strict membership requirements are clearly an advantage for any investor looking to isolate gold exposure through mining stocks. Though GGGG may appear to be generally similar to GDX on the surface, a closer look shows that these two ETFs are actually quite different in terms of the exposure offered and the risk factors that must be considered.

Another advantage for certain traders is the availability of GGGG for commission free trading on the Interactive Brokers platform; for investors with reasonably high turnover, the ability to trade without forking over traditional brokerage fees might be a big advantage.

Cons

The potential disadvantages of GGGG are not too serious. The concentration mentioned above should of course be considered, and it’s also worth noting that this ETF has average daily volumes considerably lower than GDX. That doesn’t mean that investors should steer clear, but it certainly makes sense to be cautious when executing trades and embrace the powers of limit orders. Finally, GGGG is a bit more expensive than the Van Eck competitor. The gap in annual fees is relatively small–just six basis points–so this issue shouldn’t really be of much concern.

Final Verdict

GGGG is a very unique way of achieving exposure to gold prices, giving investors an option that targets the yellow precious metal exclusively. For some, that may be ideal; the silver exposure included in funds like GDX and GDXJ may be less than optimal for investors with a very specific outlook. Others may not mind having a little diversification; funds like GDX or PSAU may be better choices for anyone in that camp.

Regardless of which gold miner ETF is used, investors should note that the assumption of strong correlations with spot gold prices doesn’t always hold. While it can generally be expected that gold mining stocks will move along with market prices for gold, it’s important to remember that that won’t always be the case. Mining stocks are, after all, stocks, and as such will sometimes exhibit risk/return profiles that differ from commodities such as gold. The first half of 2011 serves as a powerful reminder of this phenomenon; gold prices skyrocketed during that stretch, but mining stocks struggled. Funds like GGGG and GDX lagged behind physical gold ETFs by as much as 20%, no doubt frustrating those investors who utilized these funds to achieve exposure to the precious metal.

Disclosure: No positions at time of writing.

It is relatively easy to understand the popularity of GLD, as the unrivaled liquidity offered in this fund–it trades an average of about 25 million share per day–makes it perhaps the simplest and easiest way to achieve exposure to gold bullion. But for investors who are in the market for precious metals exposure, there are other options out there–including a product that we believe is virtually guaranteed to outperform GLD over the long run.

Pros

GLD has a number of advantages over comparable products offering exposure to the yellow metal. This fund is the biggest in the gold ETF space, and it also falls towards the cheaper end of the expense spectrum, making it an appealing options for both long-term investors and active traders alike. Also, one share of this fund corresponds to roughly 1/10^th the price of gold per ounce, a seemingly minor detail that may potentially influence investor’s decisions when comparing this fund versus IAU, which tracks 1/100^th the price of gold per ounce. That’s because the costs incurred when trading will be dampened by the size of GLD. A penny-wide spread in GLD amounts to a much smaller percentage of value than a similar gap in IAU. For investors considering a big position in a gold ETF, the difference between the allocation offered per share can potentially translate into a meaningful cost differential when moving into or out of a position [see also Gold ETF Analysis: Global X Pure Gold Miners ETF (GGGG)].

Another advantage of GLD is the incredibly active options market, making this ETF an ideal choice for investors looking to implement any number of hedging strategies to complement their existing long/short position. While options are available on some other gold ETFs, the depth of the market is not nearly on par with GLD. For any investor hoping to combine a position in this ETF with an options-based strategy, GLD is probably the best choice out there.

Cons

The biggest knock on GLD is pretty straightforward: compared to other options out there, the fund is pretty darn expensive. Although this ETF is by no means expensive–0.40% for gold exposure is a bargain–there are cheaper ETF alternatives. IAU easily takes the prize for cheapest gold ETF, charging a mere 0.25% and beating out GLD by 15 basis points from an expenses perspective. SGOL and AGOL are also cheaper than the Gold SPDR, though those differences are less severe. Although this difference in expenses is minor, buy-and-hold investors interested in minimizing total portfolio costs over the long run should consider IAU over GLD. That’s especially true because these two products are essentially identical except for the fees; the underlying asset is literally a commodity, meaning that these products are nearly identical [see also Inverse Gold ETFs: How To Bet On A Precious Metals Bubble].

Because GLD is physically-backed, this ETF is subject to some unfavorable tax rules since the IRS considers gold bullion a collectible. Long-term gains in GLD will be taxed at 28% instead of the usual capital gains rate of 15% (though all other physical gold ETFs suffer from that same drawback). Another minor drawback of GLD is that the fund sometimes holds minimal amounts of cash and does not always allocate exactly 100% of total assets to gold bullion.

Does GLD = SCAM?

The short answer: no. Some investors have expressed concern over the efficiency of GLD, as a number of web sites have popped up to suggest that physically-backed gold ETFs are scams that don’t hold nearly the amount of gold that they claim. These conspiracy theories are perhaps entertaining, but at the end of the day there is very little to them; the holdings of GLD are actually well documented, and investors have nothing to worry about.

CNBC recently ran a segment that sent one of its anchors inside the GLD vault, and the physical bars of gold bullion are regularly audited by an independent firm. The reality of the physical gold in London hasn’t silenced the wild theories concerning the whereabouts of GLD assets, but reasonable investors should have no issue with investing in GLD.

The holdings of GLD and other gold ETFs are regularly audited by independent third parties, and the inventories taken should be all the validation that most rational investors need to feel comfortable allocating some of their hard earned cash to these funds [see also Gold ETFs 101: Dozens Of Ways To Play].

ETF Alternatives

There are a number of alternatives to GLD, including one option that we believe is a better choice for the vast majority of investors out there. As mentioned previously, the cost differential between GLD and IAU is significant, and the homogeneity of the underlying assets means that GLD is essentially guaranteed to underperform relative to IAU over just about any time period. For investors with relatively small positions looking to establish a position for the long term, IAU makes much more sense: that fund will deliver better returns in any type of environment.

For those seeking physical gold exposure through an ETF, there are a couple of other choices besides IAU. SGOL offers exposure to gold stored in Switzerland, while the bars owned by AGOL are located in Singapore. For conspiracy theorists worried about any risks in storing gold in New York or London, these funds might be appealing. Those risks are, of course, minimal, but we recognize that some investors might sleep a bit easier knowing that their gold is stored securely in a remote location [see also GLD vs. IAU: Which Gold ETF Is Best?].

It should be noted that GLD might make sense for some investors. The differences in per share value might actually make GLD cheaper for certain large investors, and the aforementioned liquidity of the related options market will certainly have appeal to investors implementing more sophisticated strategies.

Final Verdict

Overall, GLD is a solid choice for investors seeking to establish exposure to spot gold prices, given the fund’s unparalleled levels of liquidity and wild popularity amongst all types of investors. Cost-conscious investors should take a closer look at IAU however, since the fund offers virtually identical exposure for nearly half the price. GLD is destined to underperform relative to IAU; the vast majority of investors seeking to access gold would be better off with IAU [see also TBAR: Too Expensive Or A Great Bargain?].

Disclosure: No positions at time of writing.

While gold has been boosted by bullish sentiment for much of the last few years, recent developments have heightened concerns about a bubble in the space. Gold prices have skyrocketed over the last few years, going from the $600 to $700 per ounce range in 2006, now to its current levels well above the $1,500 per ounce level. Just as investors looking to bet on continued price appreciation have several options for traditional long exposure to gold, those concerned about a collapse to pre-2007 levels have plenty of tools as their disposal as well. Specifically, there are a number of inverse gold options to allow investors to bet against the performance of the yellow commodity [see also Soros Sells Gold ETFs, Bad News For Precious Metal Investors?].

Inverse gold products have been become increasingly popular in recent months as weakness in commodity markets and a resurgent dollar has taken some of the wind out of gold’s sails. For investors looking to profit from an anticipated dip in precious metals prices, there are plenty of options out there. Below, we outline five ETPs to help investors put their assets against the performance of gold.

PowerShares DB Gold Short (DGZ)

This product tracks an index which is designed to reflect the performance of certain gold futures contracts plus the returns from investing in 3 month United States Treasury Bills. DGZ is an inverse ETN which has seen a spike in popularity this year, as gold has struggled to match its 2010 performance. DGZ resets exposure to the underlying index on a monthly basis, distinguishing the short strategy employed from some exchange-traded funds that reset on a daily basis.

It should be noted that DGZ is structured as an ETN; that nuance exposes investors to the credit risk of the issuing institution, but has some potentially significant tax advantages (and also allows investors to avoid tracking error and brokerage fees).

PowerShares DB Gold Double Short (DZZ)

This product is the 2x leveraged counterpart to DGZ, as it tracks the same index, but simply applies a -200% strategy to the underlying benchmark, also with a monthly reset. With its explicit leverage, DZZ may not be appropriate for all investors; this fund is more of a trading tool than it is a “buy-and-hold” investment. For savvy, knowledgeable investors who feel confident that gold is due for a slide, DZZ could be a great way to provide a strong return.

It should be noted that DZZ, like DGZ, does not offer inverse exposure to spot gold prices. Rather, this fund is designed to deliver inverse exposure to an index comprised of gold futures contracts, meaning that the slope of the futures curve will have an impact on bottom line returns.

ProShares Gold UltraShort (GLL)

While the previous two options offer inverse exposure with a monthly reset, GLL resets on a daily basis. In other words, this product is delivered to deliver daily returns that correspond to 200% of the inverse movement in gold prices that day. DZZ, on the other hand, seeks to achieve its target multiple over the course of a month; the effective leverage realized can change depending on the performance of gold. There is another important difference between the two: GLL is an ETF, whereas DZZ is an exchange-traded note that exposes investors to the credit risk of the issuer [see also Seven Factors To Consider When Evaluating Gold ETFs].

Daily Gold Miners Bear 2x Shares (DUST)

DUST is a different kind of gold ETF, as it offers exposure to companies that are involved primarily in mining for gold. In recent years many investors have embraced stocks of commodity intensive equities as a means of achieving exposure to natural resources. Because the profitability of these companies depends on the market price for their products (i.e., commodities), stock prices tend to move in unison with spot prices of the related natural resources. When gold prices are soaring, the outlook for the companies that extract and sell gold improves–and vice versa.

Investors should note that these stocks generally exhibit high volatility to being with, so adding leverage on top of that can lead to some big price swings. DUST currently seeks to deliver daily returns that correspond to -200% of the NYSE Arca Gold Miners Index, a benchmark that includes several of the largest gold miners in the world. Direxion has announced that DUST will convert to a -3x leveraged ETF during the fourth quarter of 2011.

Gold Trendpilot ETN (TBAR)

This product is a bit unique from the others profiled in this list; TBAR actually offers long exposure to gold by seeking to replicate the RBS Gold Trendpilot Index. But this product could be intriguing to investors interested in gold exposure but concerned about a potential bubble. The index to which TBAR is linked oscillates exposure between gold and cash depending on the price of the metal relative to the moving average. So there is essentially a built-in safety mechanism that will limit downside loss potential while still allowing investors to participate in a significant portion of any upside appreciation.

Disclosure: No positions at time of writing.

Enter exchange traded products. ETFs have become popular a means of establishing exposure to gold; the benefits of the exchange traded-structure, such as low costs and intraday liquidity, appeal to all types of investors. These funds have been quickly embraced by numerous institutional traders as well as big name investors like George “The Man Who Broke The Bank Of England” Soros, John Paulson, and Eric Mindich. And as these funds have surged in popularity, so too has the creativity of numerous issuers looking to hop on the gold bandwagon [see Three Legendary Investors With Huge Positions In GLD].

Innovation in the industry over the last several years has given those looking to establish a position in gold more options than ever before. From futures-based funds to leveraged and inverse options, there are more than two dozen ETP options for accessing gold, each with a unique risk/return profile:

Physically-Backed Gold ETFs

Physically-backed investing is by far the most popular approach when it comes to gold ETP allocations. The reason? These products are fairly straightforward, allowing investors to get exposure to spot gold prices at a low cost with few associated risks.

• Gold SPDR (GLD): This ETF invests in physical gold, meaning that it will reflect changes in spot prices of the commodity.

• iShares COMEX Gold Trust (IAU): This ETF also invests in physical gold, and is cheaper than GLD in terms of expense ratio.

• ETFS Physical Swiss Gold Shares (SGOL): This ETF invests in physical gold, storing bullion in Switzerland.

• ETFS Physical Asian Gold Shares (AGOL): This ETF invests in physical gold, storing bullion in Singapore.

Futures-Based Gold ETFs

The underlying assets of these ETFs consist not of gold bars, but of futures contracts. Returns in these products are attributable to three factors: movements in spot gold prices, slope of the futures curve, and interest earned on uninvested cash. Though futures-based products offer great advantages in that investors do not need a complex futures account to own contracts, these funds are susceptible to certain risks that other ETFs do not carry. One of the biggest and most well-known risks is contango [see also Seven Factors To Consider When Evaluating Gold ETFs].

When markets are contangoed (gold futures markets consistently are) and interest rates are near zero, futures-based funds may lag behind physically-backed ETFs in terms of performance. When rates climb, however, the interest earned on non-invested cash might have the ability to enhance returns on futures-based funds. This process can also occur in the reverse, whereby front month futures are cheaper than current contracts, leading to a gain in the roll process. This is known as backwardation.

Below we outline two futures-based products available for investment:

• PowerShares DB Gold (DGL): This ETF generates returns based on a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.

• E-TRACS UBS Bloomberg CMCI Gold ETN (UBG): This product is an exchange-traded note, meaning that investors are exposed to the credit risk of the issuer, but avoid tracking error issues.

Precious Metals ETFs

These products offer exposure to numerous precious metal with varying strategies. Note that some include only gold and silver, while others include metals like platinum and palladium as well. Also, some are of these ETFs are physically-backed, while others are futures based [see also Eight Legendary Gold Investors].

• ETFS Physical Precious Metal Basket Shares (GLTR): This ETF invests in a physical basket of the following metals: gold, silver, palladium, and platinum.

• PowerShares DB Precious Metals Fund (DBP): This ETF invests in a basket of precious metals futures contracts on gold and silver.

• iPath Dow Jones-UBS Precious Metals Total Return Sub-IndexSM ETN (JJP): This product has a similar exposure as DBP, investing in futures contracts on gold and silver.

• Pure Beta Precious Metals ETN (BLNG): This ETF invests in a basket of precious metals futures contracts including gold and silver.
  

Gold Miners ETFs

Gold miner ETFs are another popular choice as they allow for investment in companies that produce identifiable cash flows, as opposed to a bar of gold that will never make an interest payment or distribution to shareholders. Because the profitability of gold miners depends on the prevailing market price for the underlying assets, stocks of these firms tend to exhibit a strong correlation to gold prices–and often trade as a leveraged play on spot prices. There are currently several ETPs that offer exposure to gold miners, though there are subtle differences between each that call for a closer inspection of each before deciding which choice is right for your portfolio [see Gold Miner ETFs: Breaking Down All The Options].

• Market Vectors Gold Miners ETF (GDX): The most popular way to access gold miners, GDX offers exposure to an index that consists of both U.S. and international gold miners. Underlying companies include companies that own many of the world’s largest gold deposits and mining operations, including Barrick Gold and Goldcorp.

• Market Vectors Junior Gold Miners ETF (GDXJ): This ETF is the small-cap counterpart to the immensely popular GDX, giving investors, which will give investors more room for growth at the cost of higher risks associated with smaller companies.

• Global X Pure Gold Miners ETF (GGGG): This ETF is another play on gold miners, but the investment methodology of GGGG sets it apart from its competitors. In order to be included int he underlying index, a company must generate at least 95% of total revenues from gold operations. That requirement filters out many of the largest precious metals miners as silver, copper, and other metals may make up more than 5% of the total revenues for many major companies.

• PowerShares Global Gold and Precious Metals Portfolio (PSAU): PSAU casts a wide net of precious metals miners, with holdings that focus on gold, silver, platinum, and more.
  

Gold Explorers ETFs

Gold explorers are more speculative than gold miners, as the majority of the companies have very little proven reserves, but instead are highly engaged in the search for new supplies of the shiny commodity. While this asset class may seem very risky, the upside potential is huge; the ETFs offer a way to bet on exploration companies literally striking gold.

• Gold Explorers ETF (GLDX): For now, this product is the sole option when it comes to gold exploration, holding around 30 companies who maintain operations all around the world.
  

Leveraged/Inverse Gold ETFs

These products are complex trading tools that are only meant for those who truly understand how they work. For those investors who have the risk tolerance to buy into a leveraged/inverse gold option, they can be met with handsome reward or stunning losses. A single session movement of 10% isn’t all the uncommon for these ETFs, making them and attractive play for those looking to establish short-term positions in gold.

• Direxion Daily Gold Miners Bear 2x Shares (DUST): This ETF seeks to deliver daily results that correspond to -2x the daily change in the NYSE Arca Gold Miners Index, the same index to which GDX is linked.

• Direxion Daily Gold Miners Bull 2x Shares (NUGT): This ETF is the bull counterpart to DUST, offering a way to bet on rising gold prices and improving profitability for gold miners.

• PowerShares DB Gold Short (DGZ): This product is designed to return -100% of an index which invests in gold futures contracts.

• PowerShares DB Gold Double Short (DZZ): This product is designed to return -200% of the same index that DGZ tracks.

• ProShares Gold UltraShort (GLL): This ETF seeks to return -200% of the performance of gold bullion.

• Ultra Gold (UGL): This ETF seeks to return 200% of the performance of gold bullion.

• DB Gold Double Long ETN (DGP): This fund returns 200% based on the benchmark followed by both DGZ and DZZ.

Note that in December 2011, DUST and NUGT will switch their targeted exposure to -300% and 300%, respectively, of the underlying index.

Best Of The Rest

While many of the above listed funds have fairly straightforward strategies on making gold allocations, there are several products that approach gold investing with unconventional methods, giving investors plenty of options when it come time to make the decision on which of these ETPs to purchase [see also Gold ETF Investing: Closer Look At All The Options].

• RBS Gold Trendpilot ETN (TBAR): This ETF offers a low maintenance strategy that oscillates between gold and cash based on observable price signals. The oscillation process is determined by the relative performance of the historical moving average of the price of gold bullion. TBAR may add value thanks to the efficiencies of the ETN structure (investors won’t incur trading costs or capital gains)

• UBS E-TRACS S&P 500 Gold Hedged ETN (SPGH):This product generates its returns by investing an equal amount of assets in both the S&P 500 Total Return Index and gold futures contracts, providing a nice hedging strategy all under one ticker.

• 2x Gold Bull/S&P 500 Bear (FSG): FSG offers a way to bet on the relative performance of gold, for those who believe bullion will beat the S&P 500. Note that because gold and U.S. equities often move in opposite directions, and because of the explicit leverage in this product, FSG can often exhibit significant volatility.

Disclosure: No positions at time of writing.

In recent years, ETFs have become extremely popular tools for establishing access to gold. ETFs have allowed for the everyday investor to allocate their resources to gold without emptying their bank accounts, or dealing with the risks of physically holding the metal themselves. Various exchange traded products offer exposure in several different strategies; investors now have the option to invest in stocks of gold miners, futures-based gold ETFs, and leveraged and inverse products as well [see Precious Metal ETFs: Physical vs. Equity Exposure].

But the most popular means of establishing gold exposure through ETFs involves physically-backed ETFs, which hold a number of advantages over other strategies for accessing gold. The appeal is quite simple; because the underlying assets are bars of gold bullion, the value of physically-backed gold ETFs should move in unison with changes in spot prices. One of the biggest draws  to these products is the issues they avoid that popular futures-based funds have long been saddled with, including the ultimate value-killer: contango. Another major attraction is the simplicity of the products; they own the metal itself, no complex gimmicks or investment strategies. While there are several physically-backed gold products, none have gained the popularity that SPDR Gold Trust (GLD) and iShares COMEX Gold Trust (IAU) have amassed.

GLD and IAU are similar in nature; both offer exposure to gold bullion stored in secure vaults, and as such both should move closely in unison with the spot price of gold. But that doesn’t mean that these ETFs are interchangeable. There are several subtle differences between the two that may not be immediately obvious, yet are still capable of creating a unique set of risk/return profiles [see also Soros Dumps Gold ETF Assets].

1. Expenses

The first major differentiation between these two products comes in expenses. In the summer of 2010, iShares cut the expense ratio on IAU from 0.40% to 0.25%, seeking to set the product apart from its much larger competitor. Meanwhile, GLD currently charges an expense ratio of 0.40%. That 15 basis point gap won’t have a big impact on some positions. For investors looking to invest $10,000, the annual dollar differential works out to about $15–hardly a total that will make or break your retirement portfolio. But for investors looking to maintain a position in physical gold for the long run, or for those with much larger positions, the impact of this expense ratio differential can be substantial [see also TBAR: Too Expensive Or A Great Bargain?].

2. Price / Metal Entitlement

The price discrepancy between these two ETFs may jump out at some investors: IAU is currently priced around $16 per share, with each share in the fund representing approximately 1/100th an ounce of gold. GLD, on the other hand, is priced around $160 per share, with each representing about 1/10th an ounce of gold. In other words, to get the same amount of physical gold exposure, investors would have to purchase ten times the number of shares in GLD as they would in IAU [see also 50 Excellent Tools, Resources, and Blogs For Gold Bugs].

The price of an ETF is somewhat arbitrary; it takes little additional effort to purchase 10 shares of IAU for every one share of GLD. But the “handle” of these ETFs may have an impact on the costs of establishing a position. Suppose that there are penny-wide spreads for both ETFs, a relatively save assumption given the huge volumes in each. For IAU, that works out to about .0678% of the price. For GLD, it’s a much smaller .00681%. It’s a minor difference, but one worth noting; for large investors placing big trades in a physical gold ETF, it may be cheaper to execute a position in GLD–even though the expense ratio is higher in the SPDR.

3. IAU: 100% Allocation

Buying into a physically-backed ETF, most investors would assume that all of their money is going towards the physical ownership of gold bullion, but this is not always the case. IAU features 100% daily allocation, while GLD is just barely off that mark. So what can happen to a fund that is not exhibiting 100% allocation? For starters, allocation is the process of transferring the ownership of new gold from the custodian to the trust. When the trust needs to issue more shares to meet investor demands, they use a process called creation, whereby new gold is delivered to the custodian who is then supposed to allocate the bullion to the trust, but this does not always happen immediately [see also Gold Miner ETFs: Breaking Down All The Options].

When there is a discrepancy between the gold owned by the trust, and the gold that was supposed to be delivered by the custodian, unallocated gold is created. This is an important issue to note, because if there is ever a dispute between trust and custodian, or if the custodian endures financial problems, the shareholder’s of that particular fund can be “exposed to losses in the amount of the gold in the unallocated account,” writes the iShares Blog. “If a negative event were to happen on a day when there was a large creation of new gold ETF shares, investors could be exposed to substantial losses.”

While the difference in allocation between IAU and GLD is very minor, it is a risk that investors should be aware of before buying into shares of either product.

4. Liquidity

While both funds are extremely liquid, the discrepancy between average daily volume may be worth noting for certain investors. IAU trades just under 5 million shares daily, compared to GLD’s near 15 million shares exchanged daily, giving GLD three times the liquidity of its competitor. Of course, there is a law of diminishing returns with liquidity; investors should be able to get penny wide spreads in either product. Moreover, the creation / redemption mechanism in place under ETFs makes average daily volume largely irrelevant when discussing liquidity of an ETF.

While the difference in liquidity between the two ETFs is minimal, it is worth noting that the options market for GLD is considerably more liquid than the options market for IAU. For some investors implementing relatively sophisticated strategies, that distinction might be worth noting.

Verdict

Both of these products are solid investments for those looking to add exposure to gold bullion to their portfolio, but there are subtle differences that make one fund better for certain types of investors as opposed to others. For the more cost-aware, “buy-and-hold” investor, IAU’s low expenses and 100% allocation make it a safer bet for a long term hold. Because of the materially lower expense ratio, IAU is virtually guaranteed to outperform GLD over the long run; investors who pick the gold SPDR are exchanging return for brand recognition [see also Eight Legendary Gold Investors].

While we think IAU is the best choice for the majority of investors out there, we do acknowledge that a position in GLD will make much more sense for certain large investors looking to achieve the most efficient execution possible. Unless you fall into that minority, IAU is probably the best bet.

Disclosure: No positions at time of writing.

The relatively new Gold Trendpilot ETN (TBAR) from RBS uses a unique strategy to offer investors a new way to play gold. This fund invests in an index that utilizes a systematic trend-following strategy to provide exposure to either the price of gold bullion or the yield on a hypothetical notional investment in 3-month U.S. Treasury bills, depending on the relative performance of gold on a simple historical moving average basis. While it may sound complex upon first glance, the strategy is relatively straightforward. The real question is whether or not this fund is worth purchasing, given that its expense ratio comes in at an unusually high 1.0% (when TBAR is invested in cash, the expense ratio drops to a still hefty 0.50%).

Under The Hood

This product may seem overly expensive on the surface, but a closer look at the inner workings of TBAR show a more practical expense structure. As noted above, this fund will invest in either gold futures, or 3-month Treasury Bills, but when the fund switches its holdings, it moves its fees as well. When TBAR is invested in gold, investors are paying 100 basis points, certainly an expensive fee by ETP standards. But when the moving average indicator is tripped, and the fund moves to T-bills, the fees shrink down to 50 basis points. While this isn’t necessarily cheap in relation to the rest of the industry, it’s important to consider the cost of making these investments on your own before overlooking TBAR as an overpriced product [see also Seven Factors To Consider When Evaluating Gold ETFs].

Theoretically, an investor could apply this strategy on their own, without the help of this ETN, but the costs can cut into a significant amount of portfolio value. Trading gold and T-bill futures on one’s own comes with numerous disadvantages. For starters, that would mean owning and understanding a futures account, which are not meant for the average investor as they can be quite complex. Second comes the commission fees; trading these futures back and forth based on the moving averages has the potential to accrue significant commission fees, which can add up very quickly for those with relatively small positions. The final disadvantage comes on the tax side of the equation. Capital gains taxes from the constant moving of positions can lead to a major headache come April as well as take away a significant amount of the gains realized [see also The Ultimate Guide To Gold Investing].

Sidestepping Trend Following Pitfalls

TBAR has the potential to help investors avoid some of the most common drawbacks of trend following strategies, including big commissions and less-than-optimal tax scenarios. And it does this thanks in large part to the structural nuances of this product; as an exchange-traded note, TBAR represents a unique solution to issues that have historically frustrated investors.

Investors implementing a similar strategy on their own would be required to regularly buy and sell futures contracts. A position in TBAR, on the other hand, requires no maintenance on the part of investors; exposure is automatically switched whenever the relevant indicator is tripped. That has the potential to save a boatload in commissions, particularly for investors with relatively small portfolios wishing to implement a trend following strategy with gold.

The tax advantages should not be overlooked either. The do-it-yourself approach that requires regularly buying and selling futures contracts also results in incurring capital gains taxes on a fairly regular basis. That has the potential to eat into returns and send the effective tax rate higher. TBAR, for the time being at least, avoids that dilemma as well; as an ETN, investors should expect to be taxed only when the position is liquidated, regardless of how many times exposure switched back and forth between gold and cash.

At first glance, TBAR’s price tag may seem unreasonably high, considering that IAU offers exposure to physical bullion for 25 basis points annually. But here is a lot more to the story than meets the eye, and consideration of the potential savings in other areas makes this product suddenly much more appealing. For investors who want to buy and hold gold, TBAR doesn’t make sense. But for those looking to combine exposure to gold with a trend following strategy, this creative and unique ETN might end up being the bargain of the year.

Disclosure: No positions at time of writing.

1. Eric Sprott: Eric is the president of Sprott Asset Management, a firm that has close to $5 billion in assets under management.  Currently, the company has three products targeting the gold space including a precious mineral fund, gold bullion fund, and a physical gold trust. However, Sprott’s love of the precious metal space extends beyond the company’s funds; in a recent interview Sprott declared that he had roughly 40% of his portfolio in the precious metal segment with a large chunk going to physical gold. With figures like that it’s easy to see why Sprott also called gold a ‘go-to asset’ that is great for any investment climate.
2. Jim Rogers: Rogers’ fortune was largely amassed from his work with George Soros starting the Quantum Fund, which has turned in some eye-popping returns over the last several decades. Lately, Rogers has become an outspoken critic of U.S. policies and has moved to Singapore in order to be closer to what he sees as the real action in Asia. Due to this view regarding Asia’s growth prospects, Rogers has become a huge commodity bull, investing in everything from corn and farmland to a variety of more industrial metals. Rogers has also become a bull on gold, recently declaring that the yellow metal will go to $2,000/oz. this decade. Rogers has also decried those who have claimed that gold is at the top of its bull market, declaring that the metal has not become frothy and that large numbers of people still do not have exposure to the yellow metal.
3. Jim Sinclair: Sinclair is a precious metal expert with decades of experience across multiple sectors of the industry. Currently, Sinclair is the Chairman of Tan Range, a company that is looking to become a gold royalty firm. More recently, Sinclair was in the news for offering a bet to any gold bear of one million dollars that the price of gold would hit $1,650 by the end of the second week of January 2011. While there was no word on if anyone took up Sinclair on the offer—as gold did not hit that mark in January—it further demonstrates the level of confidence that he has in the yellow metal. Sinclair also publishes a blog entitled “Jim Sinclair’s MineSet” which is designed to give investors commentary about the gold market and is free to all.
4. John C. Hathaway: A rising star in the gold world, Hathaway manages a series of products that have a tilt towards the yellow metal. Among the most popular funds are the Tocqueville Gold Fund, Tocqueville Gold Partners, as well as separate accounts for individuals and institutional clients following a gold strategy. At the time of writing, Hathaway’s Tocqueville Gold Fund was the among the best performing mutual fund in the gold equities space, outpacing the category average for all time frames longer than one month.
5. Joseph M. Foster: Foster may not be nearly as well known as some of the other names on this list but that shouldn’t stop you from learning a little more about him. Foster, who got his start with Van Eck in 1996 as a precious metals mining analyst, is currently a lead investment team member for the company’s popular product the Van Eck International Investors Gold Fund.  In this role, Foster has led the fund into the top spot in the gold mutual fund space over the last five years, giving investors a return of roughly 20% or close to 600 basis points above the category average.
6. John Paulson: Paulson made a name for himself in the financial crisis of 2008 in which he correctly predicted the turmoil that many banks would face in the years ahead. Now Paulson is predicting high levels of inflation in the coming months and years and is looking to gold to help mitigate this onslaught. In fact, Paulson also has a Gold Fund which has close to $900 billion in AUM which was up more than 30% last year alone. In some of his other funds, Paulson has heavy bets on gold ETFs such as GLD, as well as over $1.8 billion in AU and $550 billion in KGC. With so much of his capital riding on the performance of gold investors would be wise to follow Paulson’s holdings for more clues on gold’s price in the months ahead.
7. George Soros: Arguably the most controversial investor on the list, Soros has recently declared that gold is ‘the ultimate bubble’ but has nevertheless poured vast amounts of capital into funds tracking gold as well as equities of companies that produce the product.  In particular, Soros has been a huge fan of the ultra-popular GLD despite its relatively expensive cost. This is probably due to the fund’s superior volume levels which could allow the money manager to quickly move out of the product should things take a turn for the worse in the gold market. Additionally, he also has some exposure to the Market Vectors Gold Miners ETF (GDX) which is seen by many as a leveraged play on the price of gold.
8. Marc Faber: The famous Swiss fund manager who publishes the ‘Gloom Boom & Doom report’ has been a goldbug for years. This is largely due to what Faber calls ‘inflationary policies’ by the Federal Reserve in the U.S. which the investor believes will likely cause the U.S. dollar to continue to deprecate making gold an intriguing investment for those looking to preserve capital. Marc also believes that gold is not in a bubble state and still has plenty of room to run before it tops out. “If it were a bubble a lot of people would have gold. The whole world would be trading gold 24 hours a day. But I don’t think it’s really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252.”

While investing in a gold bar is relatively simple, there is still a great deal of confusion over the many relatively new ways to obtain exposure to the metal, as well as some of the factors that contribute to the risk/return profile. While the potential rewards of investing in gold are tremendous–as evidenced by the huge price run-ups over the last year–the risks are substantial as well. Much of this is due to the challenges with accomplishing exposure to spot prices beyond physical holdings–and misunderstandings over the alternatives, including stocks or ETFs of producing companies and futures contracts. Fortunately, there is no shortage of free resources dedicated to making this asset class easier to understand, analyze, and ultimately buy. Below, we profile 50 gold blogs, Web sites, and tools that are helpful for all walks of commodity investors, from beginners to seasoned pros (sign up for the free Gold ETF newsletter):

Gold News Sites

These sites focus on bringing investors news from a wide variety of sources.

1. Seeking Alpha provides a list of ‘opinion leaders’ in the commodity space which could provide valuable insight.
2. MineWeb has news and information about a wide range of commodities from gold and silver to uranium and copper.
3. The Daily Crux offers at least one article day from around the web on the subject of gold.
4. 321Gold pulls in stories from around the web on the subject of gold as well as news on other precious metals as well.
5. Mining Nerds has stories on a variety of topics in the mining sector and it has gold prices in numerous currencies beyond the dollar as well, which is a nice touch.
6. USA Gold has a wealth of stories about gold markets as well as providing insight into other commodities and currencies as well.
7. Goldline not only sells gold but provides investors with news stories on the industry and the outlook for the precious metal.
8. Gold Sheet offers links to quotes about a variety of precious metal related topics including spot prices and miners stock quotes.
9. TheAUreport has data from a variety of mining firms and industry insiders, giving investors an edge in the gold market.
10. Gold Industry News has links from a number of sources about every aspect of the gold industry broken down by both topic and country.
11. TheBullionDesk has a wide range of info on gold in a variety of currencies as well as news on mining firms as well.

Gold Blogs

1. Gold And Silver Blog Takes an in-depth look at two of the world’s most famous precious metals.
2. Gold Basics focuses on the precious metals market taking a look at both mining firms and the futures market.
3. Safe Haven discusses a variety of commodities with a special focus on precious metals.
4. The Gold Economy highlights news stories that impact gold miners as well as general trends in the industry.
5. Gold Alert provides an in-depth discussion of gold mining companies and investment opportunities in the sector.
6. Got Gold Report analyzes gold stocks and gold futures on a variety of technical metrics as well as some fundamentals as well.
7. Gold Stock Bull is written by Jason Hamlin, an avid gold trader who focuses on technical analysis.
8. CMI Gold Silver has a great blog which analyzes the gold market with a focus on government actions and their impact on the metal.
9. GoldCore also sells a variety of precious metal products as well as an up-to-date blog detailing gold’s performance and movements.
10. BuyGoldCo has a blog on gold’s movements and a forum as well.
11. American Gold Exchange has daily updates on the price of gold, commentary on the movement of the precious metal, and charts as well.

Gold Industry Sites

These sites give investors access to some of the largest gold producing companies in the world.

1. Barrick Gold is currently the world’s largest producer of gold in the world, developing 7.7 million ounces a year of the metal.
2. GoldCorp is a major gold miner based out of Vancouver. It has its operations concentrated in the America with a heavy focus on Canada and Mexico.
3. Newmont Mining is the largest gold miner based in the U.S. although it does have operations around the world as well.
4. Newcrest Mining is the largest miner of gold that is based out of Australia, and it is rapidly expanding into Indonesia and other Pacific islands as well.
5. AngloGold Ashanti is the largest producer of gold out of South Africa, accounting for roughly 7% of total global output.
6. Gold.org provides investors access to information straight from the World Gold Council, an organization that represents some of the world’s largest mining firms.
7. Minerals.usgs.gov isn’t an industry site per se, but it does offer in depth information regarding the mining and recycling of gold over the years with breakdowns by country and company.
8. GoldMining.org has information on how much gold has been dug up, how much is left, as well as the major players in the space.

Tools

The following sites all have great tools that every gold investor should bookmark ASAP.

1. AssetCorrelation is a go-to place for investors looking to see how in-step their investments are likely to move to gold.
2. HardAssetInvestor has a wealth of charts on a wide range of commodities including gold.
3. ETF Database has an excellent screener that investors can use to pinpoint their commodity exposure in exchange-traded product form, helping investors to find the right gold ETF for their portfolio.
4. Finviz has some very interesting ‘heatmap’ data on gold and a wide range of other commodities as well.
5. Kitco lets investors see a live 24 hour chart for gold giving investors the opportunity to see how gold is trading around the clock.
6. 24hGold has a number of interesting tools including one that gives investors stock performance of various companies in the gold mining, exploring, and production sectors.
7. Gold Price shows investors how gold has performed in a number of currencies over the long haul. They also provide a calculator and apps to help investors stay-up-to-date on the world of gold.
8. Geology.com gives investors an in-depth discussion of all the ways that gold is used; some may surprise you!
9. GoldBarsWorldwide has a wealth of information on gold coins and bullion; it even shows you how to convert between the different sizes and what the different weights and purities are for certain types of bars.
10. Coinflation gives investors the ability to see how much gold is in their circulating coins, such as Liberty Gold Dollars and Indian Quarter Eagles.

For Traders

1. Traders Log focuses on widely-traded commodities, giving investors a variety of charting options for a number of products.
2. Morningstar has a great list of data regarding a wide range of commodities including futures contract volume and open interest figures.
3. Bloomberg has all the important commodities and their spot prices on one page and even has information regarding major commodity indexes as well, allowing investors to compare gold to other commodities.
4. Commodity Trader provides helpful information on the futures market, adding analysis that can help technical traders sift through the news.
5. Futures Mag is a site that is built for traders; giving them charts, analysis and technical metrics that can be extremely useful to those playing the liquid gold market via futures.
6. Inside Futures includes articles and posts on commodities and futures trading.
7. Daily Futures has information about data releases as well as stats on a wide variety of commodities.
8. CommodityHQ offers investors in-depth information on a variety of commodities, including gold.
9. CME Group has live feeds of gold futures which trade on the COMEX.
10. TSXGold is focused on gold and precious metals in the Toronto Stock exchange. A great resource for those focused on the Canadian market.

Found a good resource that we missed? Let us know in the comments below!

The reasons for the tremendous popularity of gold ETFs are numerous; these vehicles allow investors to maintain an ownership interest in gold without going through the hassle of acquiring bullion and devising secure storage arrangements. Buying shares of an exchange-traded security is infinitely easier than purchasing gold bars or coins and storing in a safe deposit box or secure vault.

Gold ETFs also provide a cost-efficient means of accessing the yellow metal; most exchange-traded products charge management fees that are significantly less than 1%, and far below the costs that would be incurred to store gold locally (sign up for the free Gold ETF newsletter).

Evaluating Gold ETFs

As the popularity of gold ETFs has skyrocketed, it shouldn’t be surprising that the number of products offering exposure to this asset class has increased tremendously as well. Investors around the globe now have a number of different choices for establishing exposure to gold. And while more choices is almost always a positive development for investors, navigating through all the options to find the one that is most suitable to specific objectives can be a challenging task. Below, we walk through seven criteria that should be considered when trying to find the gold ETF that is best for you or your client:

1. Best Approach To Gold Exposure: Commodity Or Equities?

Gold is one of the most widely followed commodities in the world, and many investors considering a gold ETF are likely interested in a product whose underlying assets consist either of gold bullion or physical gold. But one increasingly popular option for gold exposure involves investing in the stocks of companies engaged in the extraction and production of the precious metal [see also 50 Excellent Tools, Resources, and Blogs For Gold Bugs].

Like any company, the profitability of a gold miner is impacted by the prevailing market price for the goods sold. So when gold prices climb higher, companies whose operations focus around mining and selling gold see their profitability increase—and vice versa. As such, there tends to be a relatively strong correlation between spot gold prices and the profitability of gold miners (and therefore the value of their stock).

There are some potential advantages and potential drawbacks to this strategy. Because gold miners often maintain significant fixed costs that remain stable regardless of gold prices, these securities often trade as a leveraged play on spot gold prices. That can be either a pro or a con; investors looking to bet big on gold may appreciate the effective leverage, while those with a lower risk tolerance may not. Unlike gold bars, gold mining companies have an identifiable stream of cash flows generated from their operations. A gold coin will never make a distribution or coupon payment, making fundamental valuation of the metal challenging. But gold miners generate regular cash flow, a characteristic that some investors value.

On the downside, it’s important to keep in mind that gold miners are, at the end of the day, stocks. As such, they may exhibit stronger correlations to global equity markets than physical gold—diminishing one of the major attractions of the metal in the first place.

There is no universally right answer; exposure to gold through mining stocks makes sense for some investors but not for others. For those interested in this approach, there are a number of different types of equity ETFs focusing on companies in gold-related industries:

• Gold Miner ETFs: These ETFs, including GDX and GGGG, offer exposure to more established gold mining companies.
• Junior Gold Miner ETFs: Junior gold miners, accessible through GDXJ, offer exposure to smaller miners that may not maintain significant reserves. These companies are often more volatile than larger, more established gold miners.
• Gold Explorer ETFs: Gold exploration firms, accessible through GLDX, often have minimal operations and negative cash flows. These are companies that are literally hoping to strike gold.

2. Physically-Backed vs. Futures Based

For investors who decide to achieve exposure to gold directly as opposed to the stocks of companies that discover and extract the metal, there is another important choice to make. The current suite of gold ETFs includes both physically-backed funds and futures-based products. The underlying holdings of physically-backed products are generally gold bullion—bars of gold stored in a secure vault (much more on this below). Futures-based products achieve exposure to gold prices by investing in exchange-traded futures contracts with gold as the underlying. There are both pros and cons to each approach.

The price drivers of physically-backed ETFs are relatively simple; these funds move in unison with spot gold prices. Futures-based ETFs are a bit more complex, as three factors impact performance: 1) spot price of gold, 2) roll yield related to the slope of the futures curve, and 3) interest earned on non-invested cash.

Since these futures-based ETFs don’t take delivery of the physical gold, they must sell contracts as they approach expiration and buy futures that reach maturity further off in the future. This “roll” process can contribute to overall ETF returns; when markets are contangoed—longer-dated futures are more expensive than those approaching expiration—the roll yield will have an adverse impact on returns. When the opposite is true—markets are backwardated—the futures-based approach will put the wind at your back.

The market level of interest rates can also determine the relative merits of these two strategies; when rates are near zero, the additional money earned on uninvested cash will be negligible. But if rates climb higher, this source of return may become more material.

Since gold markets are consistently contangoed, physically-backed products will generally deliver a more attractive return, and they will always track spot gold prices more closely. Many of the largest and most popular gold ETFs are physically backed, including GLD and IAU. But there are a number of futures-based products that can be attractive in certain environments or for certain investors. These include:

• PowerShares DB Gold (DGL)
• E-TRACS UBS Bloomberg CMCI Gold (UBG)

3. Is It Really An ETF?

This question may sound a bit absurd, but understanding the impact of product structure on overall return can be a challenging task—especially in the commodity space. Exchange-traded products are open-ended in nature, meaning that there exists the flexibility to create new shares when needed. Closed-end mutual funds, on the other hand, don’t have the ability to issue new shares. That’s a potentially important distinction, because it limits the ability of closed-end products to efficiently track the price of gold.

Exchange-traded funds are backed by an arbitrage mechanism that allows certain authorized participants to create or redeem shares if the market price of the fund deviates from its net asset value. When the price of the fund rises above its NAV, the AP would exchange bars of gold for additional shares of the ETF. Selling those shares on the open market would result in an arbitrage profit, and the additional supply serves to reduce the spread to NAV. But when new shares can’t be easily created, demand for an investment product can result in the creation of a premium as investors clamor to gain gold exposure.

A great example of a gold closed-end fund is the Sprott Physical Gold Trust (PHYS). Like ETFs, PHYS is traded on an exchange—the NYSE and TSX to be specific. And like GLD or IAU, the underlying assets consist of gold bars stored in secure vaults. Yet PHYS doesn’t always move in unison with spot gold prices, as this product is a closed-end mutual fund that can’t create new shares to keep prices in line with NAV. As a result, there is another risk factor introduced to the equation: the premium/discount value. PHYS has historically traded at a premium to its NAV, reflecting significant demand for the exposure offered (we’re not exactly sure why).

Suppose that you invest in a closed-end gold fund trading at a premium of 5%. Gold prices then rise by 7%, but the premium on the fund flips to a discount of 5% as a result of shifts in investor sentiment. Instead of a nice gain, you’d experience a loss as a result of the flip from premium to discount. This is obviously an extreme example, and fluctuations in the premium/discount can work in favor of investors as well. But it’s important to understand where exactly your risk exposure is [see the full Gold ETF list here].

Understanding the nuances of various product structures is far from exciting, but it’s an important step of evaluating potential gold ETF investments. Make sure any product you’re considering is an open-end fund; just because it looks like an ETF and trades like an ETF doesn’t mean it’s an ETF.

4. Vault Location

For investors who choose to achieve pure play exposure to gold through an ETF whose assets are bullion stored in secure vaults, there are still more decisions to make. Though the owner of shares in a gold ETF will likely never come in physical contact with the metal in which they maintain an ownership interest, he or she still has a say in where that gold is stored.

Some investors aren’t concerned with the location of the gold that underlies their gold ETF. All exchange-traded products store gold in secure vaults, and there are countless safeguards in place to ensure that there is no unauthorized access. Most gold bars to which physically-backed ETFs are linked are stored in the U.S. or in London. But there are other options as well.

Gold bugs are known to skew towards the paranoid, so it is perhaps no surprise that gold ETFs offering alternative vaulting arrangements. Some point to the gold confiscation of 1933—in which the government ordered U.S. citizens to turn over any gold coins, bullion, or certificates—as justification for concerns about owning gold stored in U.S. vaults. Others are wary of the increased risk for terrorist acts in Western countries such as the U.S. or the U.K., concerned that locations that are home to billions of dollars worth of gold could make for a prime target.

For these concerned investors, there are gold ETFs that offer exposure to assets stored securely in other locations around the globe. ETF Securities offers a number of Swiss Gold ETFs in multiple countries, including the ETFS Physical Swiss Gold Shares (SGOL) listed on the NYSE. The gold bars backing this fund are stored in Switzerland, a country known for its neutrality and strong investor protections.

There’s also the Physical Asian Gold Shares (AGOL), a fund that vaults gold in Singapore. This Asian Gold ETF might be appealing to investors looking to store bullion in an out-of-the way location.

It’s worth noting that there is no significant premium for storing gold in Singapore or Switzerland. AGOL and SGOL both charge expense ratios of 0.39%, a single basis point less than the ultra-popular gold SPDR. So there is little extra cost to this paranoia, and for many the peace of mind and diversification provided is well forth any additional fees (IAU charges just 0.25%).

5. Gold ETF…With A Side Of Silver?

Gold is by far the most popular of the precious metals—at least for use as an investable asset. But investor interest in other precious metals has picked up quite a bit in recent years, as evidenced by the plethora of funds offering exposure to silver, platinum, and palladium.

Though all of these commodities fall under the precious metals umbrella, the price drivers (and therefore the returns) can be drastically different. Gold’s primary use is in investment vehicles, while platinum and palladium are used widely in actual vehicles—they’re critical inputs in the auto manufacturing process. Silver falls somewhere in between, as it is used as both an investment and inflation hedge and in a number of industrial applications [see also Eight Legendary Gold Investors].

There are dozens of gold ETF options out there, differentiated by type of exposure, vault location, and a number of other factors. But there are also exchange-traded products that offer exposure to multiple precious metals, tilting holdings towards gold but also including allocations to silver, and in some cases platinum and palladium. For investors looking to spread the precious metals exposure around a bit, any of the following options might be worth a closer look:

• PowerShares DB Precious Metals Fund (DBP): This futures-based fund splits exposure between gold and silver, but is heavily tilted towards the former; the yellow metal’s base weight in the underlying index is 80%.
• ETFS Physical Precious Metals Basket (GLTR): There are two major differences between this product and DBP: 1) GLTR is physically-backed, meaning that the underlying holdings consist of vaulted bullion, and 2) this ETF includes platinum and palladium in its holdings.
• iPath Dow Jones-UBS Precious Metals ETN (JJP): This exchange-traded note (ETN) also focuses on just gold and silver, giving the larger weighting to the more valuable commodity.

Silver has been on a tear over the last year, so many of these funds have outperformed the pure play gold ETFs out there. There is, of course, no guarantee that these trends will continue, but recent history highlights the potential value of complementing gold with other precious metals.

6. Expenses

Hundreds of billions of dollars have flowed into ETFs in recent years, highlighting the appeal of this vehicle to all types of investors. There have been a number of reasons for this surge in interest; the exchange-traded structure offers unparalleled transparency, enhanced tax efficiency, and intraday liquidity. But perhaps the biggest driver of the ETF boom is related to expenses—or more accurately, the lack thereof.

By now, even novice investors are aware that ETFs often maintain a significant cost advantage over mutual funds. But some make the mistake of assuming that all ETFs are created equal—when in fact the gap between many expense ratios is wide enough to drive a truck through.

This is certainly the case in the gold ETF space, where deltas between management fees can be significant and are obviously capable of impacting bottom line returns. The RBS Gold TrendPilot ETN (TBAR) accrues expenses at a rate as high as 1.0% per annum when invested in gold (this ETN is a bit unique, as is oscillates exposure between gold and cash depending on momentum factors). On the other end of the expense spectrum is the iShares COMEX Gold Trust (IAU), which charges investors just 0.25% annually. Somewhere in between are the futures-based DGL (0.50%) and the ultra-popular GLD (0.40%), along with several other options.

These differences may seem minor, and the dollar impact to short-term investors will be inconsequential. But for those seeking gold exposure for the long term, minimizing the impact of compounding costs can go a long way.

7. Taxes

Many investors cringe at the idea of a discussion over taxes, but this area is important to cover for any exchange-traded product and especially for gold funds. Gold ETFs may trade just like equities, but investors who make the assumption that gains will be taxed like gains in stocks are in for a bit of bad news. According to the Internal Revenue Service, gold is classified as a collectible when held in the form of coins or bullion. That means that long-term gains are taxes at 28%, which is nearly twice the 15% rate applicable to long-term gains in stocks and bonds. And unfortunately for ETF investors, physically-backed gold ETFs are subject to taxation as collectibles—meaning any long-term gains in GLD will be given a 28% haircut by the tax man.

This point circles back to an earlier note on the impact that the product structure can have on bottom line returns. ETFs that invest in futures contracts are subject to unique taxation rules, and incur obligations or benefits annually regardless of whether a position was liquidated. These products are taxed at a blended rate: 60% short-term capital gains and 40% long-term capital gains.

Many gold ETF investors become aware of the tax consequences of their investment only upon sale. A hefty and unexpected bill can take some of the luster off of a successful investment; make sure you understand the tax implications before you establish a position in any of the gold ETFs out there.

Disclosure: No positions at time of writing.