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How Safe Are Gold ETFs?

NEW YORK ( TheStreet) -- As evidenced by the May 2010 ETF flow data compiled by the National Stock Exchange, gold continues to be one of the most popular investment themes around. Thanks to exchange traded funds like the SPDR Gold Shares (GLD) and PowerShares DB Gold Fund (DGL), this yellow metal has been transformed into an asset class of its own.

While popular, not every gold-focused ETF is identical. By understanding the risks that can be associated with physically backed and futures-backed gold ETFs, investors can find the safest routes of access to this popular commodity.

Physically-Backed

Among the safest ways to gain exposure to gold is through the use of physically backed ETF products. Currently, there are three products designed in this manner: GLD, iShares COMEX Gold Trust (IAU) and ETFS Physical Swiss Gold Shares (SGOL).

GLD tracks a collection of London Good Delivery Bars located in the London vaults of HSBC Bank USA (HBC). Investors not willing to take the company's word for it have the ability to see pictures of the inside of the vault and track a "gold bar list" on its website.

Unlike GLD, the gold underlying iShares' IAU is not concentrated in a single location. Instead, Bank of Nova Scotia (BNS - Get Report), the fund's custodian, has spread the gold bars across a number of locations including New York City, London, Montreal and Toronto.

SGOL, the newest player to the physically backed gold ETF game, tracks a collection of gold bars held by JPMorgan (JPM - Get Report) in maximum security vaults located in Zurich, Switzerland.

While all three funds insist that investors are gaining access to actual gold, this has not stopped conspiracy theorists from proposing that the gold underlying these funds is actually being loaned out and is not actually held in the vaults. These fears, however, can quickly be displaced upon examination of the funds' respective prospectuses. In the case of GLD and IAU, the funds' sponsors promise that all but a miniscule portion of the gold (fractional portions of bars) representing the fund is considered allocated. Allocated gold is metal that can actually be delivered to the investor. SGOL's website explains that the bullion held in the trust is entirely allocated.

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SYM TRADE IT LAST %CHG
SGOL $116.36 0.90%
IAU $11.49 0.88%
GLD $114.10 0.90%
DGL $39.16 1.08%
BNS $55.52 0.96%

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