ETFs(Exchanged-traded funds), or Trackers, are investment funds trading on stock market exchanges just like stocks. These funds reproduce the performance of assets, stocks (stock indices), currencies, commodities or bonds. They trade near the value of their underlying assets. These funds are passively managed, their goal being simply to track the evolution of an asset, not to surpass it. The growing popularity of ETFs since 2008 stems from their low management fees and the lost confidence of investors in traditional fund managers who actively manage their portfolio and charge a hefty price without actually doing better than the stock indices.
We should distinguish between ETFs and ETCs (Exchanged-Traded Commodities), which track the performance of commodities by either holding them physically or via futures or other financial products.
SPDR Gold Shares (GLD) are the most important ETC based on gold and the second most important of all products. It is traded on the New York, Hong Kong, Singapore and Tokyo stock exchanges. Each share is backed by 1/10 oz. of gold. The gold is held mainly in HSBC’s London vaults in the form of 400 oz. good delivery bars. This fund has drawn some criticism due to its complex structure and its relation with certain commercial banks that could cause conflicts of interest, notably with HSBC which, while stocking the fund’s gold, also holds very large short positions on silver price and gold price.
The HUI Gold BUGS (Basket of Unhedged Gold Stocks) index is a tracker that follows the performance of 18 gold mining companies that do not hedge their gold production for a period exceeding 18 months.
List of 18 companies on the HUI:
Barrick Gold Corp
Agnico Eagle Mines Ltd
Alamos Gold Inc
AngloGold Ashanti Ltd
AuRico Gold Inc
Yamana Gold Inc
Compania de Minas Buenaventura SAA
Eldorado Gold Corp
Gold Fields Ltd
Randgold Resources Ltd
Harmony Gold Mining Company Ltd
Kinross Gold Corp
Newmont Mining Corp
New Gold Inc
Sibanye Gold Ltd
The GDX index offers some exposure to the gold mining industry. It is comprised of companies from all over the world which operate mainly in gold production. They hold shares in small-, medium- and large-market capitalization companies.
These funds offer some indirect exposure to gold through shares, but their structure is relatively complex and opaque. Most of the time, the gold is stored by commercial banks such as HSBC and JP Morgan. While the low costs are attractive, one is exposed to several counterparty risks: broker default, fund bankruptcy or clearing house default.
At GoldBroker, we recommend direct gold ownership, with no intermediation, and storage outside of the banking system.