The Three Amigos of Gold ETFs
Christian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in gold ETFs can be tricky. With over 20 products and several different investment structures ranging from ETNs to inverse and leveraged ETFs, one can quickly get lost. A memorable starting point to understand and remember the most widely used gold ETFs is to use "The Three Amigos of Gold ETFs" approach. This borrows from the 80's comedy "The Three Amigos," and uses the movie's legendary stars - Steve Martin, Chevy Chase and Martin Short - as memory associations. While it is a bit quirky, the understanding gained from these associations will provide any investor with a strong base of gold ETF knowledge to build on.
Amigo #1: Steve Martin = SPDR Gold Shares (NYSEMKT: GLD)
GLD, the SPDR Gold Trust, is the largest physical gold ETF in the world with around $70 billion in assets. Think of GLD as the always dependable and world renown Steve Martin. GLD's shares are backed by physical gold stored in a vault - a very big vault - in London. For investors who want exposure to the returns of gold through an ETF, GLD is the default choice. GLD charges an annual expense ratio of 40bps. It should be noted however that an upstart competitor in iShares Gold Trust, (NYSEMKT: IAU), also merits consideration. IAU charges a peer group low 25bps and stores its gold in three locations: Toronto, New York and London. With assets of around $9 billion, it is picked up a fair amount of new inflows of late. Here's the performance grid snapshot of the two competitors from GoldETFs.biz.
Amigo #2: Chevy Chase = Market Vectors Gold Miners ETF (NYSEMKT: GDX)
GDX, the Market Vectors Gold Miners ETF, owns a basket of large cap focused gold mining stocks. GDX is the Chevy Chase of gold ETFs because its approach to gold investing is a bit unconventional. If you haven't heard, investing in gold stocks, like gold miners, is an indirect investment in gold. In other words, gold stocks can significantly deviate in performance versus gold even though the price of gold heavily influences these companies' financials. GDX is the largest gold stock ETF with over $6 billion in assets and it charges an expense ratio of 53bps. The largest country weighting in GDX is Canada at 62% and 87% of the stocks are large cap. (market cap greater than $5 billion)
Amigo #3: Martin Short = Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ)
GDXJ, the Market Vectors Junior Gold Miners ETF, owns a basket of small to mid cap gold mining stocks. And sorry, an ETF with "junior" in its name just seems appropriate for the pint sized comedian Martin Short. GDXJ is the second largest gold stock ETF with over $2 billion in assets. Junior gold miners, like small cap stocks, tend to be significantly more volatile than large cap gold mining stocks. These stocks are generally considered to be the most aggressive way to invest in gold through equities. With an expense ratio of 54bps, GDXJ has 62% of its allocation in Canadian stocks and 67% of the stocks are considered small cap. (less than $1 billion in market cap)
Similar Yet Different
From the outside looking in GLD, GDX and GDXJ are all gold ETFs by definition, just like Steve, Chevy and Martin are all comedians. However there is no question that each comedian and ETF performs quite differently. Here's a performance bar chart of each gold ETF from stockcharts.com using the longest comparison possible. Note the sizable variation in performance.
Besides performance differences, the career paths of The Three Amigos have been unique in their ups and downs. The Three Amigos of Gold ETFs share that dynamic as well. Just review this chart below of each ETFs' path over the last 12 months to see the ups and downs.
The Three Amigos of Gold ETFs - GLD, GDX and GDXJ - are distinctive in their unique investment approaches. Understanding these ETFs via The Three Amigos can provide an investor with great foundational knowledge of the gold ETF landscape. This is especially true given most of the other products are just variations - or perhaps sequels - of the originals. So have fun with this explanation because like Steve Martin, Chevy Chase and Martin Short, these ETFs will become legends.
ChristianMagoon has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.
