Note: This article was updated on November 11, 2016, and originally published Oct. 10, 2015.
There are dozens of gold ETFs on the market, all designed to offer investors an attractive way to profit from the rise, or in some cases the fall, of the price of gold. Some gold ETFs track the price of physical gold either through direct or indirect ownership. Meanwhile, others own the stocks of gold mining companies, which typically rise and fall along with the price of gold. However, as I'll soon show, the best gold ETFs to ensure one actually profits from a rebound in the gold price are those that own the physical commodity.
The best gold ETFs move in lock-step with gold prices
One of the problems investors face when trying to profit from a rebound in a particular commodity price is that they can be right on their thesis, in this case, that gold will go up, but be wrong in their chosen vessel. To visually display that point, take a look at the following chart, which tracks the uber-popular gold ETF SPDR Gold Trust (NYSEMKT:GLD), the senior gold miners ETF Market Vectors Gold Miners ETF (NYSEMKT:GDX), and the price of gold over the past 10 years.
What's worth noting is that while the price of gold is up strongly over the past decade, both ETFs have underperformed, though the SPDR Gold Trust has nearly matched the move of gold, with its slight underperformance attributable to fees. On the other hand, the ETF of gold mining stocks, Market Vectors Gold Miners, has not only vastly underperformed the price of gold, but it is down nearly sharply over the past decade.
That underperformance of gold miners, resulting from several issues within the mining industry, including debt, cost overruns, labor issues, and management missteps, cost investors dearly. That's why the best gold ETFs are those that own gold and gold alone because the risk of being right on the price movement and wrong on the investment just isn't worth the risk.
The best gold ETFs
While there are numerous gold ETFs out there that own gold, three stand out.
1. SPDR Gold Trust.
2. iShares Gold Trust (NYSEMKT:IAU).
3. Sprott Physical Gold Trust (NYSEMKT:PHYS).
As the following chart shows, over a long period, the trio largely matches the movement in the price of gold, though all three do underperform because of fees.
However, each has a unique characteristic that investors will want to consider.
The SPDR Gold Trust is the granddaddy of gold ETFs, holding more than $40 billion in assets. Its objective, according to its fact sheet, is "to reflect the performance of the price of gold bullion, less the Trust's expenses," which as the preceding chart noted, it has done a good job. That said, its expenses, which are currently 0.4%, do indeed lead to some minor underperformance versus the price of gold. Further, it's also worth noting that "the Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash," again according to its fact sheet. In other words, the investment is in the Trust, which owns gold, and not directly in gold itself.
The iShares Gold Trust is very similar to the SPDR Gold ETF, but it's smaller in size and has lower expenses. Its expenses are just 0.25% per year, which leads to less underperformance versus the price of gold over the long term, which is why it has done a slightly better job tracking gold.
Finally, the Sprott Physical Gold Trust offers investors a few new wrinkles. While its fees are a bit higher, as it charges a management fee of 0.35% per year and an administration fee that tacks on another 0.07%, the structure of the trust is more tax effective. Taxes on realized gains are at an individual's capital gains tax rate (which is as low as 15% if the investor holds the trust for more than a year) instead of the 28% tax rate applied to gains from collectibles. So, should the price of gold skyrocket, an investor could keep more of the gain by owning the Sprott Physical Gold Trust than either SPDR Gold Trust or iShares Gold Trust.
Thanks to a lower expense ratio, the best gold ETF is the iShares Gold Trust, because it has the least underperformance versus the price of gold. Meanwhile, investors concerned with taxes might want to consider the Sprott Physical Gold Trust. Finally, the SPDR Gold ETF is the king of the hill for a reason; its enormous size means it has the most liquidity, even if that comes at a higher cost.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.