When it comes to commodity investing, precious metals are some of the most highly traded commodity markets in the world. Gold in particular, has long been embraced for its inherent value and safe haven appeal. Historically, investors have added gold exposure to their portfolio via physical holdings or futures trading, but thanks to the democratization of the ETF industry, gold exposure can be purchased through a single ticker [for more commodity news and analysis subscribe for our free newsletter].
Currently, State Street’s SPDR Gold Trust (GLD) is the largest and most popular gold ETF. Since its launch in 2004, the fund has accumulated over $32 billion in total assets under management; on average, its shares trade over 7 million times per day.
Last week, however, investors were introduced to yet another gold ETF – Merk’s Gold Trust (OUNZ).
Like GLD, OUNZ is designed to track the spot price of gold bullion. What makes OUNZ unique is that for the first time, investors will be able to trade shares in exchange for physical gold bullion. According to Merk, the fund “seeks to provide investors with a convenient and cost-efficient way to buy and hold gold through an exchange traded product with the option to take physical delivery of gold if and when desired.”
According to its prospectus, OUNZ will hold gold bullion in the form of allocated London Bars, held in London vaults managed by J.P. Morgan Chase. The initial basket of OUNZ shares were created with a per share price equal to the value of 1/100 of a fine ounce of gold. The initial gold required was 500 fine ounces of gold per basket, each of which equals 50,000 shares.
For the purpose of facilitating delivery, Merk will convert the London Bars into gold coins and bars in denominations investors request. This request must be done through a broker [see New Aluminum Hedging Feature Coming to LME].
The Costs of Redeeming Shares
There are hefty “exchange fees” for investors wanting to redeem their shares for physical gold. An investor will have to pay:
- A 2.5% fee on 10 ounce bars, with a minimum charge of $2,500
- A 2.5% fee on London Bars, with no minimum charge
- A 3.5% fee on 1 ounce bars, with a minimum charge of $3,500
- A 6.0% fee on 1 ounce coins, with a minimum charge of $6,000
- A 7.0% fee on 1 ounce American Gold Eagle Coins, with a minimum charge of $7,000
If investors choose to redeem their share for physical gold, it should be noted that no taxable event will be triggered since OUNZ shareholders own a pro-rata share of gold held by Merk. For those only interested in holding the ETF, OUNZ charges an expense ratio of 0.40%.
The Bottom Line
While the delivery and exchange fees are quite hefty, OUNZ has certainly opened the door for commodity ETFs. Furthermore, its launch is particularly newsworthy in the Gold ETF space, since many critics have questioned whether or not funds like GLD actually hold gold.
Disclosure: No positions at time of writing.