Cost is Key When Comparing Gold Funds

Gold funds are among the most popular ETFs in Europe in 2016 with €10 billion inflows, according to data complied by Morningstar Direct

Karen Kwok 4 October, 2016 | 12:19AM
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This article is part of Morningstar's Guide to Passive Investing, helping investors make smart choices to meet their long-term investment goals.

Investors have poured €10 billion into gold funds this year; the most inflows into any sector across Europe, data from Morningstar Direct showed.

The precious metals ETFs sector in Europe under the Morningstar Category recorded €1.2 billion inflows in August alone, although this fails to top inflows in February where funds saw €2.6 billion inflows. Demand for gold ETFs has been since the beginning of the year, with the sector recording inflows for eight consecutive months.

Five Gold ETFs within the sector have each recorded more than €1 billion inflows year to date, according to Morningstar Direct. Among those ETFs Physical Gold (PHAU) and Source Physical Gold P-ETC (SGLD) each gained inflows of €1.8 billion from January to the end of August. Director of passive research at Morningstar, Ben Johnson said as these two funds are backed by physical gold holdings, they will track movements in the spot price of the yellow metal with fewer fees.

Cost is Key When Comparing Funds

The total expense ratio, which includes carrying costs, is a key differentiating factor for physical metals funds, with lower total expense ratio and fees obviously being better.

ETFs Physical Gold levies an annual expense ratio of 0.39% while Source Physical Gold P-ETC levies a total expense ratio of 0.29%, just behind competitive offerings from iShares and UBS at 0.25%, Johnson said. iShares Physical Gold ETF (IGLN) has proved the third most popular fund within the sector year to date, recording €1.6 billion inflows from January to August this year.

ETFS Gold Bullion Securities ETC (GBS), which gained €1.3 billion inflows year to date, levies an annual expense ratio of 0.40% and it is most liquid on its home exchange, the London Stock Exchange. Xetra-Gold (4GLD) also received €1.2 billion inflows year to date, however Johnson reminded investors that this ETF does not include all custody and storage fees.

European and US Investors Fuel Global Demand

The gold price has rallied 19% so far this year, benefitting from a weak US dollar caused by the lack of an interest rate hike by the US central bank.

The uncertainty around the US Presidential election in November and the Brexit vote also boosted gold-related investment demand, according to the latest quarterly report by World Gold Council.  Increasing demand among US and European investors has fuelled much of the gains in global gold-related investments in 2016 so far.

“With interest rates on the floor or negative, gold continues to offer investors a low cost hedge against crisis, stock market volatility and the upturn in global inflation,” said Adrian Ash, head of research at BullionVault, the gold online trading platform.

Morningstar’s Johnson agreed, explaining that “gold is traditionally sought after as a store of value in times of severe economic dislocation, an insurance policy against financial Armageddon”.

He added that investment demand for gold has increased in recent years as the world’s precious metal has been made more accessible to the masses via exchange traded products.

Relative to investing directly in gold or coins outright, Gold ETFs offer the benefits of low costs and superior liquidity, Johnson added.

“Gold exchange-traded products are the least costly, most broadly accessible and most liquid vehicles for acting upon one’s gilded aspirations,” said Johnson.

Exceptional Inflows into Gold ETFs

According to the World Gold Council, ETFs stole the show with “exceptional” inflows this year, with 579 tonnes in the space of six months globally, compared with cumulative outflows of 616 tonnes over the preceding 10 quarters.

Market participants currently see just an 88% chance that the Federal Open Market Committee will increase interest rates when it meets in November, according to the CME FedWatch Tool, the US futures company.

Investor sentiment will continue to have an impact on the price of the yellow metal, Johnson said. Therefore, allocations to gold should only occupy a small portion of a well-diversified portfolio.

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 ETC169.62 USD0.28
Invesco Physical Gold ETC176.33 USD0.22
iShares Physical Gold ETC35.55 USD0.23
WisdomTree Physical Gold172.12 USD0.23
Xetra-Gold51.45 EUR0.24

About Author

Karen Kwok

Karen Kwok  is a Reporter for