Tony's ETF Buyers Guide: All Gold Everything

What are Gold Grantor Trusts?

When the average retail investor thinks of a gold ETF, they're usually picturing something that's technically known as a grantor trust, not a traditional ETF. This might sound like jargon only ETF aficionados care about, but it does have implications for investors.

Most stock and bond ETFs are classified as open-ended funds under the Investment Company Act of 1940. This designation allows these funds to continuously issue and redeem shares, facilitating liquidity and enabling them to closely track their underlying index.

However, ETFs that hold commodities like physical (spot) gold, are categorized differently—they're grantor trusts. This classification subjects them to a different set of regulatory requirements, primarily under the Investment Company Acts of 1933 and 1934.

Does this distinction matter to the average investor? In some ways, yes, especially when it comes to taxes. Grantor trusts are taxed differently than traditional ETFs, which can affect the net returns on your investment if you aren't holding them in a tax-sheltered account.

However, in terms of functionality, these gold trusts operate much like ETFs. They offer investors the ability to trade shares throughout the trading day at market prices and aim to closely track the spot price of gold, albeit with a slight tracking error due to fees.

Examples of popular grantor trusts that offer exposure to physical gold include the SPDR Gold Shares (

) and the iShares Gold Trust (

IAU

+0.46%

), along with their more affordable counterparts, the SPDR Gold MiniShares (

GLDM

+0.48%

) and the iShares Gold Trust Micro (

IAUM

+0.51%

). Other notable mentions are the abrdn Physical Gold Shares ETF (

SGOL

+0.49%

) and the GraniteShares Gold Trust (

BAR

+0.5%

).

What are Gold close-ended funds (CEFs)?

Another product that investors often mistake for gold ETFs are gold CEFs. The distinction between these two types of investments is crucial.

ETFs feature a "creation and redemption" mechanism, which essentially allows for the continuous issuance and retirement of shares based on demand. This process helps maintain the ETF's liquidity and ensures its price stays close to the net asset value (NAV) of the underlying assets.

CEFs, on the other hand, have a fixed number of shares issued at their initial public offering (IPO). As the name suggests, they are "closed" to new capital after the IPO. This means that if a CEF experiences high demand, its shares can trade at a premium to the NAV. Conversely, if there's a lot of selling pressure, the shares might trade at a discount to the NAV.

This dynamic of trading at a discount or premium to NAV is important for investors in gold CEFs. It's crucial not to overpay for shares trading at a significant premium, but also to be wary of investing in a fund that consistently trades at a discount, as it might indicate underlying issues or investor sentiment.

A prime example of a notable gold CEF is the Sprott Physical Gold Trust (PHYS), which is currently trading at a -1.56% discount to its NAV. For prospective investors, this means the shares of the trust are available for purchase at a price slightly below the value of the gold per share the trust holds. This can be appealing for buyers looking for a potentially undervalued entry point.

Investing in Gold miner ETFs

Finally, there are gold ETFs that don't hold physical gold at all. Instead, these are open-ended funds established under the Investment Company Act of 1940, and they invest in companies involved in gold mining and gold streaming.

Gold miners are companies that actively mine for gold. They make money by extracting gold and selling it on the market. Gold streamers, on the other hand, provide upfront financing to mining companies in exchange for the right to buy gold at reduced rates in the future.

A well-known example in this category is the VanEck Gold Miners ETF (

), which tracks the NYSE Arca Gold Miners Index. This ETF offers a portfolio of 59 global gold miners, offering investors indirect exposure to gold prices, but through the lens of industrial operations and market demand.

The benefits of investing in gold miner ETFs include the potential for dividends—GDX, for example, yields 1.47%. Additionally, in times when gold prices are rising, these ETFs can act like a leveraged play on gold. This is because miners' profitability can increase significantly with slight rises in gold prices, reflecting disproportionately in their stock prices.

However, this leverage effect has its downsides. It works both ways, leading to high volatility in gold miner ETFs. They won't track the spot gold prices closely because their performance is also influenced by company-specific factors, such as operational efficiency, exploration success, and geopolitical risks affecting mining locations.

For those willing to accept more risk for the potential of higher rewards, ETFs focusing on junior miners are an option. These funds invest in smaller mining companies with the potential for significant growth, albeit with increased risk.

The VanEck Junior Gold Miners ETF (

) is an example to watch in this space, targeting companies in the early stages of mining exploration and development.

Junior miners can offer explosive growth if they strike gold, literally, but they're also more susceptible to failure, making investments in this sub-sector more speculative.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.