Earlier this month, I wrote a piece about why I believe GDX and GDXJ are not great vehicles for gold investors.
But they’re not the only ETFs out there… and believe it or not, some of these other ETFs are even worse…
US News and World Report recently put out a list of the “The Top 5 Gold ETFs to Buy Today” – and I’m going to quickly go through this list and just talk about why I’m not a fan of any of these funds.
The list:
SPDR Gold MiniShares (NYSE: GLDM)
iShares Gold Trust Micro (NYSE: IAUM)
VanEck Junior Gold Miners ETF (NYSE: GDXJ)
ProShares Ultra Gold (NYSE: UGL)
VanEck Merk Gold ETF (NYSE: OUNZ)
Right off the bat, you need to know that four of these ETFs don’t own any gold miners.
Three of them (in theory) track the price of gold. I think if you are going to try to get the benefits of owning gold (including the upside in price) you should own physical metal.
Part of the problem with owning an ETF that simply tracks the price of gold is that there’s some question of whether there’s actually gold that’s owned by these funds. That means that during any kind of real physical supply crunch, we could discover a devaluation moment in real time that destroys share value even if gold is soaring higher.
They may own a fractional amount of gold relative to their market cap. Or they may own paper gold – which means you’re buying a paper claim on a paper claim… Or it could be an even more distant claim on actual physical metal.
GLDM is just GLD that sells for a lower individual share price. If you’re too strapped to buy a single share of GLD then you probably have bigger issues to consider.
IAUM is similar to GLD and GLDM (it in theory gives you upside to gold’s price) with the only difference being that it has a relatively low expense ratio of just 0.09% compared to GLDM’s 0.10%…
The UGL ETF gives you 2X leverage to movements in the price of gold – and the fund actually doesn’t own any gold at all. They achieve their leverage with a variety of leveraged derivatives – made on paper gold. And it charges you a sky-high 0.95% expense ratio for this privilege.
One of the big conspiracies about gold that I’m sure you’re aware of is the idea that gold’s price is manipulated by large financial institutions. It’s not so much a conspiracy theory since JP Morgan paid a $920 million fine 5 years ago for the crime of manipulating the price of precious metals…
The Financial Times Headline from September 2020 says it all:
“JP Morgan to pay $920m in largest-ever spoofing settlement
Bank admits it manipulated precious metals and Treasuries markets for eight years”
I really don’t care what kind of games banks like JPMorgan want to play – but if you want to get the real benefits of owning gold, you should own it in an allocated account if not in an actual safe in your house.
If it’s in your possession or it’s in an insured and allocated account with a reputable bullion bank – then you know that you actually own it.
The OUNZ ETF claims that you can redeem your shares for physical gold. But it’s unclear to me how that redemption works. There’s a 94 page prospectus filled with fine print detailing how much it costs and how much you need to own in order to redeem your shares for gold.
If you want gold, just buy gold!
And if you want to buy gold miners/royalties – you should buy them directly instead of buying an ETF.
The only ETF in this list that does hold miners is GDXJ – and I’ll quote myself from earlier this month on why I think it’s a waste of your time and capital:
“GDXJ in theory, focuses on smaller firms – but they’re actually not that much smaller. All of the major holdings are well over $1 billion market cap companies, with some being over $30 billion or more… so there’s not much “junior” about this ETF that supposedly tracks junior mining stocks. Real junior miners tend to be below $500 million…“
You’re much better off being selective and only buying the best junior gold miners for yourself – and skipping the 0.51% expense ratio that VanEck charges. When you buy an ETF like GDX or GDXJ, you have to remember these funds are not actively managed to help you benefit from the best gold miners in the sector. They’re designed to track an index, which means there’s no real qualitative analysis or screen. You’re getting the good, the bad and the ugly.
If you’re interested in avoiding the bad and the ugly, it’s worth checking out my GPIV portfolio – which covers a handful of my favorite gold miners and royalty firms.
I think you’re much better off buying a few companies that you can understand fully – instead of buying a whole index (as with GDXJ) or some paper claim on a paper claim ETF (like the rest of these funds in the list.)
Part of the song that’s sold to main street investors about finance is that it’s too complicated for you to do for yourself. I think that’s nonsense. You can and should understand your investments.
After all, no one has a more vested interest in your success than you do – and you really can’t afford to outsource your personal fiduciary responsibility.
Take a look at this writeup about my GPIV research for yourself to see what I mean.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio