Mitigate Rising Interest Rate Risk – What You Need to Know...

Chq logo

Those looking for a reason to add commodity exposure to their portfolio will find gold’s massive historical return to be heavily persuasive. This precious metal has quickly become one of the few safe haven investments left on the market as investors will typically flock to gold when equities falter.

Some swear by futures contracts, while others are more partial to obtaining their gold positions by investing in the mining sector, which can offer lucrative opportunities as these securities often have high betas. Still, others have embraced exchange-traded products as their primary means of establishing a position in this commodity.

No ETF has been more instrumental to gold’s rise than the SPDR Gold Trust (GLD), which was briefly the largest ETF in the world by assets. GLD has established itself as an investor favorite and as one of the most popular funds around. But the fund is not without its drawbacks and for those looking to establish long-term exposure to gold, there is one fund that offers a more enticing investment thesis, the COMEX Gold Trust (IAU).

The Gold Case

Gold Nugget on Display

We at are not nay-saying GLD. Nor does this article have to do with the speculation that GLD does not actually hold gold. Instead, this article aims to help long-term investors add gold exposure to their portfolio using a buy-and-hold method rather than traders looking for active positions.

If it seems like these two funds are nearly identical on the surface, it’s because they are. Both funds track physical gold bullion, with GLD representing approximately 1/10th of an ounce of gold while IAU represents about 1/100th of an ounce of gold. When it comes to liquidity, GLD takes the cake. The fund has a very active options market, almost eight times the assets of IAU, and a daily volume that is nearly double its smaller competitor. This makes GLD a prime trading instrument and it has certainly produced massive returns for a number of traders. However, for long-term investors IAU has a clear edge [see also Does GLD Really Hold Gold, Or is it a Scam?].

After all is said and done, it boils down to a few basis points: IAU charges 0.15% less than GLD, making it the ideal long-term hold. If that number sounds insignificant, consider two different million-dollar portfolios, one wholly invested in GLD and the other wholly invested in IAU (setting aside the diversification nightmare for the moment). The GLD portfolio will incur annual expenses of $4,000, while its competitor will shell out only $2,500. That $1,500 difference seems minuscule for just one year, but drag it out over a 30-year investment and the difference between fees amounts to $45,000, or 4.5% of your original investment. Saving yourself a quick 4.5% could have been as simple as buying IAU instead of GLD.

Also consider that IAU’s cheaper fees will mean that it will generally outperform its competitor. Though the difference will be slight, there will be a noticeable delta between the two when the time frame is expanded to multiple decades. Note that GLD’s size and trading volume can tweak these numbers a bit, but evidence shows that assets may be headed towards IAU, which could erase this issue in time. IAU slashed its expense ratio in mid-2010, making 2011 its first full trading year at 0.25%. In 2011, IAU saw cash inflows of over $2.7 billion, while GLD saw outflows of $372 million, suggesting that long-term investors have begun to catch on to the money-saving trend between these two ETFs [see also Seven Reasons To Hate Gold As An Investment].

Final Thoughts

As mentioned earlier, GLD is likely the supreme trading instrument for more active investors. The fund offers unmatched liquidity and a strong options market. But when it comes to long-term investors, IAU emerges as the clear winner. With a wide range of individuals and analysts predicting gold’s rise to continue throughout the years, a number of investors have added exposure to their retirement accounts or at least some kind of long-term basket of holdings. For those who have adopted a gold strategy that will stretch over multiple years, consider the money that could be saved with IAU and the difference that a few seemingly insignificant basis points can make.

Don’t forget to subscribe to our free daily commodity investing newsletter and follow us on Twitter @CommodityHQ.

Disclosure: No positions at time of writing.

Popular Articles

Navigating Rising Rates

Are you looking for strategies that perform well in rising rate environments?


Why Is Everyone Talking About the Commodities Supercycle?

If you have been reading about commodities, chances are you read about a supercycle. Every major...


What Lies Ahead For The Oil Market

If there’s one asset class that can affect the entire global marketplace, it’s oil. A...