4 ETFs for Picking Up Cheap Gold

As the price of gold falls to a five-year low, we look at the benefits of investing in the precious metal and how investors can get access to the commodity through passive funds

Emma Wall 24 July, 2015 | 10:30AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Morningstar Passive Fund analyst, Kenneth Lamont. Hi, Kenneth.

Kenneth Lamont: Hello, Emma.

Wall: So we're here today to talk about the Internet's favorite subject other than Kim Kardashian and that is gold. Gold bugs as they are known; those individuals that always seem to comment on the bottom of every single financial article, saying that the gold is the only true investment, have come a little bit unstuck at the moment because gold is at a five-year low. They tend to say that gold can go only one way and that's up and that's not necessarily the case.

However, it is a fantastic diversifier. And you could argue that at this price point, it could be a good entry point. However, there are a number of different ways you can get exposed to gold. That's why we come to you. I thought perhaps you can explain the first way to get exposed to gold and that's the real physically-backed one, the one that should we have an international financial disaster, this is where you want to be.

Lamont: Absolutely, for those investing in gold, that assurance, the money invested is invested directed in physical gold and backed by gold bullion is extremely important. For this, we like the Source Physical Gold P-ETC. This particular product has very tight spreads; a very large AUM. It's a very impressive product.

For those who want that extra layer of security, they may look at the ETF Securities Gold Bullion Securities ETC, which goes one stage further and allows investors to physically access that gold if necessary at some point in the future.

Wall: So, let's just spell that out. That means if you hold this ETC, you could actually call up and say, I want my gold and get it in your hands; get gold bars in your hands?

Lamont: That's correct, yes.

Wall: Okay. And what about for those, because they do come with a premium, don’t they, a price premium in order to allow people to have access to that gold. Is that right?

Lamont: Yes. I mean there will be transactions costs involved in receiving your gold, but it's there.

Wall: Not all gold ETFs are physically backed, though. Are they? What is the other options available?

Lamont: Well, for start, these gold products are ETCs, and therefore, are not UCITS compliant. So for those unable to invest in non-UCITS vehicles, it may be better to look towards something such as the iShares Gold Producers ETF, which invests in gold producers equity. It invests in the equity of companies that produce mine and sort of operate within the gold space.

Wall: That's quite interesting one because although it has gold in the title, which may lead some people who perhaps don't do their homework to suggest that they are getting a diversification in their portfolio, it is actually an equity ETF, which means it, I suppose, is liable to the kind of fluctuations with the stock market, you do get that equity risk with this product.

Lamont: It certainly dilutes some of the diversification benefits. However, on the other hand, these companies do pay dividends. So, you may be able to receive a stream of income from this fund, whereas with the previous funds mentioned, there is no dividend.

Wall: What about the fact that when you are investing in gold, you are actually taking a currency bet, because gold is priced in dollars? Is there any way to mitigate or take advantage of that?

Lamont: Certainly, there are several funds or several fund providers now offering options, currency hedged options, one for U.K. investors maybe the db Physical Gold GBP Hedged product, which uses futures to protect against adverse currency movements and allow you to focus on the price of gold exclusively. However, there is a trade-off; you'll be likely to pay around 40 bps more per year in terms of management cost for this privilege.

Wall: We should just say, of course, that gold is an alternative and, therefore, appropriate probably for a smaller holding within a well-diversified portfolio. We're not saying just because it's a five-year low, people should go out and fill their portfolio with gold.

Lamont: Absolutely.

Wall: Kenneth, thank you very much for your time.

Lamont: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Gold Bullion Securities ETC GBP13,666.53 GBP0.15
Invesco Physical Gold ETC179.41 USD0.08
iShares Gold Producers ETF USD Acc13.79 USD0.07Rating
Xtrackers Physical Gold GBP Hedged ETC999.76 GBP0.38

About Author

Emma Wall  is former Senior International Editor for Morningstar