Case Study: Investing in Gold with ETFs

Case Summary

Bob is interested in adding gold to his portfolio after reading the results of a joint study by the World Gold Council and New Frontier Advisors.  The study found that the appropriate allocation to gold is dependent on the portfolio risk level, recommending a 1-2% allocation for low risk portfolios and 2-4% in a balanced risk portfolio.
However, Bob but isn’t sure how to get started.  Should he take delivery and pay for storage or simply buy the equivalent of a warehouse receipt?  Is it better to invest in the physical asset or some derivative linked to the price of gold?  What about gold miners instead of gold itself?


Investors seeking to gain exposure to gold have several options, so they need to go with the solution that best fits their situation.  Taking delivery of gold and paying for storage can be expensive and cumbersome. Exchange Traded Funds offer the benefits of direct physical ownership of gold without having to take delivery and providing for secure storage.  For more leveraged exposure, other ETFs provide access to derivatives linked to the price of gold or the future price of gold.

One drawback of investing in gold directly is that the commodity does not earn income nor pay dividends.  However, gold mining companies do offer the potential for growing earnings and dividends while also providing exposure to gold prices.  The drawback for mining stocks is that they tend to be more volatile than the price of gold itself.

Portfolio Recommendations

The most direct and cost effective way to add gold to a portfolio is with an ETF that owns and stores physical gold.  With these ETFs, Bob will get the equivalent of a “warehouse receipt” that represents his ownership share.  A small amount of the gold is sold on a periodic basis to cover expenses.  The largest physical gold ETF is the $34 billion SPDR Gold Shares (GLD) . The gold that underlies Gold Shares is held in the form of allocated 400 oz. London Good Delivery Bars in the London vaults of HSBC Bank USA.  An alternative toGLD is the iShares Comex Gold Trust (IAU) which also buys and stores gold bullion on behalf of its investors.

Short term leveraged exposure to Gold can be gained through ProShares Ultra Gold (UGL) and UltraShort Gold (GLL).  Both funds seek to return twice the price movement of London Gold Bullion on a daily basis.  For longer term leveraged exposure, check out the PowerShares DB Gold Double Long Exchange Traded Note (DGP) which is two times leveraged with respect to the monthly performance of the Deutsche Bank gold index.

For exposure to Gold mining stocks, Bob should consider the Market Vectors Gold Miners ETF (GDX) which invests in a diversified group of companies involved primarily in the mining of gold.  Top holdings include Barrick GoldGoldCorp and Newmont Mining.  The $4 billion fund carries a net expense ratio of 0.55%.