State Street’s GLD ETF: Is it Just Paper Gold?

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[dropcap]B[/dropcap]ecause so many people own it, and because we utilize it in some of our portfolios, it is appropriate to post a very brief discussion about the popular gold ETF, GLD. Managed by State Street’s SPDR ETF group, GLD has over $60 billion in assets as of this writing.

As shares of the ETF are created, it actually buys physical gold and stores it. If shares are unwound, it sells the gold. This is what you want if you want to own gold through an ETF. The bottom line: GLD is a reasonably good way to get exposure to changes in the price of gold. Those who buy it should be aware of a few things.

It charges 0.4 percent annual management fees. This sounds low, but it is a lot for exposure to something that historically has returned roughly the rate of inflation. Just understand that your actual returns will be something like a half a percent lower than actual gold. The history of the fund has demonstrated exactly this. For most, this is a fair price to pay for the convenience and liquidity GLD offers.

Long-term gains in GLD are taxed as collectibles at 28 percent, not the lower long term capital gains rate.

In the event that the gold the ETF holds is captured or destroyed, holders are pretty much out of luck. Personally, I do not worry too much about this, but it is worth knowing. GLD holds its gold in London, not the US.

There are a lot of conspiracy theories surrounding GLD. There is no way to be completely certain, after looking at it quite a bit, GLD seems perfectly legitimate to me. There is some small chance it is fraudulent and does not hold all the gold it says, but this would be a remarkable risk for anyone at a highly regulated public company to take.

Because GLD is not redeemable for physical gold, it is possible that liquidity issues force the share price away from the net asset value of the gold it represents for a period of time, especially because shorting GLD is allowed. If this occurs, it should be temporary.

Be careful if you buy other gold ETFs. Some use futures contracts which get expensive to roll over and end up costing a lot. Most people should never buy leveraged gold ETFs. You can get more information about the ETF itself (though probably somewhat biased) here:

http://www.spdrgoldshares.com/sites/us/faqs/

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Scott Baber

Scott Baber

Scott has been in the financial services industry for 10 years. His experience has been in working with individuals, families, and businesses to achieve their financial goals. Scott spent the majority of his career at Merrill Lynch where he advised hundreds of clients and provided a variety of wealth management services. Scott's success led him to start an independent practice focusing on people needing help planning for their retirement. His in depth knowledge of wealth planning and strong background in technology, enable him to deliver the innovative solutions offered by Personal Capital. In his spare time, Scott enjoys playing golf, fishing, and hiking in the Sierra Nevada Mountains.

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