GLD Vs IAU: Which Gold ETF Is Best?

GLD vs IAU: Which Gold ETF Is Best? Gold has been a valuable currency dating far back into history. If you don’t know its history, you might think gold first became a valued commodity when the Romans issued their first coins – but this precious metal dates back much farther. Over 6,000 years to be precise.

Gold’s Long History

The first appearance of gold in our recorded history is around 4,000 BC when an Eastern European civilization began using the metal to craft decorative objects. This civilization predates the ancient Sumerians by around a thousand years.

Around 3,000 BC, those in ancient Sumer, what is now known as southern Iraq, began using this precious metal in jewelry making. Many of their unique designs are still in use today.

After the Sumerians, gold is again found in ancient Egypt. It was first found dating back to 2,500 BC in Abydos at the Tomb of Djer.

Babylonians and Egyptians further mastered not only the use of gold, but how to detect and remove impurities as it became one of the very first metals used to make currency. Egyptians were blessed with the gold-laden region of Nubia and realized the importance of gold in trade.

The Shekel, which can actually refer to anything from a simple unit of measure to one of the first currencies, becomes the Middle East’s first means of payment.

But the shekel, which weighed a little over 11 ounces, wasn’t entirely made of gold. It actually consisted of a naturally occurring material known as ‘electrum’, a precious metal that was around two-thirds gold and one-third silver.

The Gold Market

Gold has been fought over, stolen, and hoarded throughout history. It’s popularity extends into today and investors love it.

The ability to use gold and other precious metals to hedge the devaluation of currencies around the world, as well as inflation and deflation, helps investors of all types have a sort of safety net when the economy becomes uncertain or downright volatile.

The market for gold offers incredible liquidity and there are various ways investors can take part – including having actual physical gold in the form of coins or bars, or exchange-traded funds, also known as ETFs.

What are Gold ETFs?

Gold ETFs are commodities with just one asset – gold. ETFs are similar to and function like actual stocks and are traded in the same way.

But the principal difference is that the ETF is comprised of derivative contracts backed by gold rather than by the dollar or other currency.

Another difference is, say you invest in a regular stock – this makes you essentially a part-owner in the company you’ve invested in.

With gold ETFs, you’re never actually an owner of any physical gold. Even if you cash in, there’s no exchange of any precious metal – you get cold, hard cash instead.

Why Invest in Gold ETFs?

If you’ve ever watched the ticker on the morning news, you’ll see how the price of gold and other precious metals fluctuates throughout the day, much the same as other investment vehicles.

When you invest in a gold ETF, you can either be glass-half-empty and think of it as an exposure to those market fluctuations, or glass-half-full in the sense that, if you’re an investor in several different vehicles, some of which carry more risk than others, trading gold ETFs actually helps to mitigate a bit of that risk.

You could also think of gold ETFs as being similar to bonds in the sense that they can help you build a financial hedge against any outside disruptions to the market, such as economic downturns and political and social unrest.

From the early 1930s through the mid-70s, it was illegal for Americans to own physical gold in the form of bullion. President Roosevelt felt that private individuals owning gold could trade the currency with foreign nations and invoked the Trading with the Enemy Act of 1917 with Executive Order 6102 just four days after he was sworn into office. This order made owning gold a punishable offense carrying a ten-year prison sentence.

With gold ETFs, you can invest in this precious metal without the inconvenience of physically storing it, not to mention the security risk of protecting physical holdings.

But investing in gold ETFs also carries an expense ratio, or annual fees charged by the ETF, that cover the company’s expenses and other costs. For instance, the market’s largest ETF for gold, SPDR, carries an expense ratio of .4%. so, say you invest $20,000 into SPDR, your annual fee would be $80.

During times of financial, civil, and political unrest, the dollar tends to weaken – the upside of this is that unrest normally has the opposite effect on gold. Holding gold ETFs can minimize your risk exposure.

On the other hand, if the market is doing well, you can sell your ETF and potentially see profits. Experienced investors sometimes “short” their ETF, also known as inverse ETFs, which is akin to betting against the house – if gold begins to plummet, an inverse gold ETF can be beneficial. All in all, it’s important to know the market.

What is IAU?

IAU, or the iShares Gold Trust, reflects the general price performance of gold. It’s not your standard ETF in the regard that it’s not required to register as an investment company. In other words, regulatory requirements other funds are subjected to, such as mutual funds, do not apply to IAU.

Investing in GLD

GLD, or the SPDR Gold Shares ETF, is perhaps the largest ETF for gold. The fund, as of June 2020, was backed by more than 36 million ounces, stored at various locations in London and around the world.

The net value of the asset, or NAV, is over $63 billion, and each share of SPDR is the equivalent of roughly .094 ounces.

The price of GLD is in direct relation with the price of gold – as gold fluctuates, so does GLD. Investors can also influence the share price. But that ultimately means that each individual share could be worth more or less than the actual value of the .094 ounces.

When the fund originated, each share was worth just a tenth of gold’s price. This fund charges an annual fee of .4%, which has slowly eroded, albeit slightly, how much gold is represented per share.

The annual fee slowly reduces the ETF’s NAV – but in relation to the long-term gain potential of gold, this is an extremely modest fee.

In fact, since the early 1970s, gold has performed well, providing investors with around a 10% annual return. For an individual to physically house the equivalent in gold of their ETF, storage fees and insurance payments would certainly be higher than GLD’s nominal annual fee. Investing in gold ETFs makes sense in that respect.

IAU Fees and Track Record

IAU has a nominal .25% sponsorship fee. At the beginning of January 2020, the ETF was trading at $14.61 per share. As the worldwide pandemic took hold, the ETF bottomed out at $14.03 per share as of March 19, 2020.

Since the plummet, the ETF has consistently risen, albeit with a bit of a plateau from April 14 through June 18. Since mid-June, this ETF has steadily climbed with a current price of $18.15 at time of press.

GLD Fees and Returns

GLD’s fees are 0.4% annually.

On January 6, 2020, GLD shares closed at a price of $147.39 and reached a high of $157.81 on March 9 before slipping to a bone-crushing $138.04 just 10 days later.

Since then, the ETF has steadily recovered with a plateau similar to IAU and is currently trading at a lofty $178.55 as of July 24, 2020.

IAU vs GLD: Which is the Better Gold ETF?

Between the two ETFs, IAU’s 5-year return (7.08%) is higher than GLD’s (6.88%).

IAU’s expense ratio is also lower than GLD’s, as noted previously. While IAU certainly has these items in its favor, share prices for GLD are much higher than IAU’s, which in the long run actually equates to a better return on investment, especially for advanced investors.

GLD vs IAU – The Bottom Line

Investing is always a personal decision that must be weighed in relation to your personal situation. If you’re new to investing or want to begin trading in gold ETFs at a lower price per share, IAU is a great option.

For an investor seeking to really play the market and ride the wave, GLD is perfect. Before you make any investment decision, however, be sure to carefully consider the risks versus returns pertinent to you. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.