The boom in gold trackers has been one of the great investment success stories of the decade. With little more than five years of history under their belt, exchange-traded funds and products investing in physical gold controlled a total of 1658 tonnes of bullion as at the end of the first quarter of 2009, according to the latest report by the World Gold Council. That’s US$48.6 billion in paper money terms, or the sixth-largest gold reserve in the world, smaller only than the official holdings of the US, Germany, the IMF, France and Italy. And inflows have recently accelerated—gold ETF holdings surged in the first quarter, with a net 469 tonnes of bullion added to the stockpile.
Matt Hougan recently reviewed the different trackers open to US-based gold investors on our sister site, www.indexuniverse.com. The US market is dominated by the SPDR Gold Shares (NYSE Arca: GLD), which has over US$30 billion under management, making it the second-largest ETF in the world.
What about Europe? A recent flurry of gold tracker product launches has given investors this side of the Atlantic a great number of options. What differentiates them and how should an investor weigh up the available choices?
ETF, ETC, T-ETC, ETN Or Certificate?
Exchange-traded product names seem designed to confuse, particularly so when it comes to commodities.
The UCITS rules for collective investment schemes, which apply to European Union member states, require a minimum level of diversification. Therefore, within the EU, a legal entity tracking a single commodity cannot be set up as a fund, and cannot be called an ETF. For that reason, the gold trackers offered by EU-based firms such as ETF Securities, Lyxor, Source and Xetra-Gold are all technically undated, noninterest-bearing debt securities and are called, variously, ETCs, ETNs, T-ETCs and certificates. So far in this comparatively young market, there’s no uniformity in naming conventions, or in legal structures.
All four of the above gold trackers are collateralised—but not necessarily by bullion itself (see below).
In Switzerland—a non-EU member—the regulator allows a fund to track a single commodity. For that reason, the gold trackers offered by Swiss banks ZKB and Julius Baer are called ETFs.
The big dividing line in the collateralisation of the tracker products is between those that hold physical metal as backing, and those that are backed by some other financial instruments (for example, government bonds).
In the former category (those backed by bullion) are ETF Securities’ Gold Bullion Securities (LSE: GBS.L) and Physical Gold ETC (LSE: PHAU.L); ZKB’s Gold ETF (SWX: ZGLD); Julius Baer’s Gold ETF (SWX: JBGOUX); and Xetra-Gold (XETRA: DE000A0S9GB0).
Gold trackers collateralised by other assets, typically government bonds, include Lyxor’s Gold ETN (LSE: LTNG.L), Source’s just-launched Gold T-ETC (XETRA: SGLD.DE) and ETF Securities’ Gold (LSE: BULL.L), Leveraged Gold (LSE: LBUL.L) and Short Gold (LSE: SBUL.L) ETCs.
Assets under management for the different trackers show that the vast majority of investors’ funds have been directed to those offering exposure to the physical metal.
|Gold Trackers: Bullion-Backed||AUM/Issued (US$m)|
|ZKB Gold ETF||4,018|
|ETF Securities Gold Bullion Secs. ETC||3,772|
|ETF Securities Physical Gold ETC||2,284|
|Julius Baer Gold ETF||969|
|Gold Trackers: Nonbullion-Backed||AUM/Issued (US$m)|
|Lyxor Gold ETN||100|
|ETF Securities Gold ETC||97|
|ETF Securities Leveraged Gold ETC||15|
|ETF Securities Short Gold ETC||13|
|Source Gold T-ETC||<1|