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3 Top Gold ETFs -- Which Is the Best to Buy?

Matthew Frankel, The Motley Fool

When it comes to investing in gold, there are two main ways to do it -- buy physical gold, or invest through an exchange-traded fund (ETF). Although the ETF route comes with an annual expense ratio, there are some big advantages as well, such as not having to store or insure the gold yourself.

There are three major gold ETFs in the market: SPDR Gold Shares (NYSEMKT: GLD) is by far the largest, but the iShares Gold Trust (NYSEMKT: IAU) and ETFS Physical Swiss Gold Shares (NYSEMKT: SGOL) also have large amounts of assets. Here's a rundown of these three ETFs, and which looks like the most attractive choice.

Four gold bars on a gold-colored background.

Image source: Getty Images.

Why add gold to your portfolio?

There are several reasons you may want to consider adding some gold to your portfolio.

For one thing, gold's value tends to keep up with inflation over time. While the supply of U.S. currency increases over time, leading to inflation, there is a finite amount of gold in the world. Sure, more gold is being mined, but there's not an unlimited supply. The effect of this is that gold has an intrinsic ability to keep up with inflation over time.

Gold also tends to outperform other investment assets, such as stocks, during tough times. For example, during 2008 when the financial crisis hit, the S&P 500 dropped by 38.5% while gold actually rose by 4.3% for the year.

On a similar note, gold can help add diversification to your portfolio, as it isn't closely coordinated to other assets. For example, stock investments tend to move up and down along with other stock investments. But gold can often move in the opposite direction of stocks, as it is seen as a "safe" asset by investors.

To sum up these points, gold can be a great complement to a well-rounded portfolio of stock and bond investments. It can be an excellent way to hedge your portfolio in times of poor stock market performance or high inflation.

What is an ETF?

An exchange-traded fund, or ETF, is an investment vehicle that pools investors money in order to invest in a certain asset or group of assets. For example, an S&P 500 ETF would pool its investors' money and buy the 500 stocks in the S&P 500 index.

ETFs are similar in principle to mutual funds, with one major difference. Unlike mutual funds, ETFs are listed on major exchanges and trade like stocks. In other words, there is no minimum investment into an ETF -- you can just buy one share. And, whereas mutual fund buying and selling transactions are completed just once per day, ETFs can be continuously bought or sold at any time the market is open.

Why use an ETF to invest in gold?

One logical question many people have is, "OK, I've decided to add some gold to my portfolio, but why shouldn't I just buy some physical gold?"

This certainly makes sense, on the surface. After all, an exchange-traded fund will charge you a recurring fee to own gold, known as the expense ratio. It may seem like you can avoid that ongoing expense by simply buying some gold bullion and holding on to it, but it's a little more complicated than that.

Don't forget the challenges of owning physical gold. First, if you buy gold bullion, you'll almost always have to pay a premium over the spot price. As I write this, gold is trading at $1,358.60 per ounce. A quick check on one of the most popular precious metal exchanges, APMEX, shows that the least I can expect to pay for a single ounce of gold bullion is $1,388.49. So, I'm paying roughly $30 more (or a 2.2% markup) to buy my gold.

In addition, you'll either need to pay for a secure place to store your gold (such as a safe deposit box), insurance in case your gold is stolen, or you'll need to bear the risk that if your gold goes missing, you'll lose your entire investment.

When investing through an ETF, you won't have any of these worries. The fund's managers ensure that your gold is safe and that you aren't paying too much of a premium. This can certainly be worth paying a small annual fee for.

In fact, the SPDR Gold Trust, the largest gold ETF in the market, states in its fact sheet, "For many investors, the transaction costs related to the shares are expected to be lower than the costs associated with the purchase, storage, and insurance of physical gold."

In addition, an ETF is likely to be a far more liquid investment than physical gold. Liquidity is generally defined as the ability to sell an investment quickly at its full market value, or very close to it. You can certainly sell gold quickly, but a precious metal dealer isn't likely to give you full market value. On the other hand, shares of an ETF can be sold at their market price, immediately, with a simple click of a button.

The three largest gold ETFs

As of this writing, there are three major gold ETFs (defined as more than $200 million in assets) to choose from.

Fund (Symbol)

Net Asset Value

Current Share Price

Expense Ratio

3-Year Annualized Return

SPDR Gold Shares

$36 billion

$128.03

0.40%

3.29%

iShares Gold Trust

$12 billion

$12.96

0.25%

3.45%

ETFS Physical Swiss Gold Shares

$1 billion

$130.59

0.39%

3.30%

Data source: TD Ameritrade. ETF data retrieved on April 11, 2018.

Unlike with most ETF comparisons, there's no need to compare the portfolios of the three funds -- they are virtually identical. All three aim to invest 100% of their assets in physical gold, although they all clearly state that they may need to hold small cash positions from time to time.

As one example, according to the SPDR Gold Trust's prospectus, "The Trust holds gold bars and from time to time, issues Baskets [groups of shares] in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets. The investment objective of the Trust is for the shares to reflect the performance of the price of gold bullion, less the Trust's expenses." As of the latest prospectus, the trust held about 26.8 million ounces of gold.

The other two funds have similar statements in their prospectuses. The iShares Gold Trust says, "The assets of the Trust consist primarily of gold held by the Custodian on behalf of the Trust. However, there may be situations where the Trust will unexpectedly hold cash." And the ETF Securities Physical Swiss Gold Shares prospectus states, "Proceeds received by the Trust from the issuance and sale of Baskets, including the Shares (as described on the front page of this prospectus), will consist of gold deposits and, possibly from time to time, cash."

The major difference

The only major difference between the three funds is the cost involved. And although the difference between iShares' low 0.25% expense ratio and the SPDR fund's 0.40% may sound quite small, it can add up significantly over time.

For example, let's say that you invest $10,000 and the price of gold increases at an average rate of 5% per year over the next 30 years. With a 0.25% expense ratio, your investment would grow to about $40,200. On the other hand, with a 0.40% expense ratio, you'd have a final investment value of roughly $38,500 -- about $1,700 less.

As you can see in the chart, the annualized returns of these three ETFs differ almost exactly in proportion to the differences in the expense ratios, as would be expected among ETFs with identical investment portfolios.

Which is the best gold ETF for you?

Because of the fee difference, I'd suggest the iShares Gold Trust for investors who want to add some exposure to the precious metal to their investment portfolio.

To be clear, all three funds are likely to be cheaper than owning physical gold bullion. Paying to insure and store gold can easily surpass the 0.40% of your assets each year that the most expensive of the three charges, and that doesn't even take the purchase premium into account.

Having said that, lower fees are almost always better when you're talking about the exact same investment portfolio. If I were to add gold to my portfolio today, the iShares Gold Trust would be my top choice.

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Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.