This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Gold Equity Funds Versus Gold ETFs

By Dave Brown - Exclusive to Gold Investing News

The demand for investment products has significantly increased over the past decade with the number of funds available to a retail investor interested in exposure to gold and precious metals providing numerous international opportunities. One primary consideration for any investor is whether they would prefer to own an actively managed fund or if they prefer to minimize investing fees and to limit the security or market timing risks of failing to correctly anticipate the future. An obvious follow up option is whether they would prefer a fund that owns gold equities or whether they would prefer exposure to the price volatility of physical gold. There are gold ETFs that track the physical price of gold and there are also gold ETFs that have exposure to a variety of gold mining and exploration stocks. With the tremendous abundance and variety of products available, a fundamental answer could involve the initial reason for adding the asset class to a portfolio.

Growing market and investment risk

As the market in gold ETFs has grown in size, so has the level of complexity and diversity of ETF products.

Many ETFs work by replicating the index they are linked to by simply reconstituting the basket of physical securities underlying the index. A number of gold ETFs track an index such as the Dow Jones North America Select Junior Gold Index or the FTSE Gold Mines Index can be an attractive investment due to low costs, tax efficiency and share-like characteristics. These ETFs can provide a relatively inexpensive and effective way to track an asset class; they have proved to be increasingly popular, and have established a successful track record with ample liquidity and traded volume.

Synthetic gold ETFs, work through entering into asset swap, such as an OTC derivative, with a counterparty, rather than physically replicating the index. Synthetic ETFs of this variety allow the underlying investment to enter into a greater number of transactions and present the opportunity of investing in assets where physical holding of the asset is not possible.

The rapid development of synthetic ETFs in Europe has seen them capture a considerable market share of the demand and the numbers are growing. Fueling this growth, according to the Financial Stability Board (FSB), are the cost synergies demonstrated between banking interests. In some instances, the ETFs can employ financial correlations using derivatives and leveraging which has generated some concern and opposition that they may be creating a new form of systemic risk. With derivative trading desks acting as swap counterparty to the bank's proprietary asset management arm, it can become relatively cost effective and easy for investment banks to produce synthetic ETFs. Further, while U.S. regulators consider restrictions on the use of derivatives in ETFs, European ETF regulation has been minimal.

Short term outcome: year to date analysis

Upon initial screening, this year's performance attribution seems to indicate the strongest appreciation for ETFs tracking the price of gold with SPDR Gold Shares, the biggest ETF up 7.1 percent; while according to Morningstar Inc. the average equity fund in the category has declined 7.7 percent.

This may represent a lag time, where the market is discounting the value of gold mining companies while insatiable demand for the yellow metal as a hedge against market risks and currency depreciation is a premium; however, in general a disparity in returns is often because gold mining equities are a leveraged play on gold.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,081.17 +50.96 0.28%
S&P 500 2,092.04 +10.16 0.49%
NASDAQ 4,813.4340 +39.9620 0.84%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs