Case study: Institutional allocators gain efficient exposure to gold using an ETF
Key takeaways
- Two institutional allocators sought efficient exposure to gold, one as part of a real assets bucket and the other as part of a diversifying bucket of uncorrelated assets.
- They found the traditional ways to gain exposure to the gold market—futures, derivatives, and physical gold—inefficient and cumbersome.
- The clients secured efficient, liquid access to gold by investing in the SPDR® Gold Minishares® (GLDM®) ETF.
Investor profile & objectives
Two clients held strategic allocations to gold. Their gold allocations played different roles in their portfolios:
- One held gold as part of a diversifying bucket of low-correlation strategies.
- The second held it as part of a real assets bucket intended mainly to help hedge inflation.
Both clients valued gold’s distinctive investment characteristics, but each wanted a more efficient way to gain exposure to it.
Challenges & constraints
Investors traditionally have secured gold exposure either through futures, by purchasing derivatives such as options and swaps, or by owning physical gold. Each approach presents tradeoffs, challenges, and/or inefficiencies in tracking spot gold.
Gold futures have to be managed carefully. To maintain constant gold exposure, investors need to monitor contract dates and roll expiring contracts into new ones, a process that may drag on returns. Futures investing involves the use of leverage, which can lead to volatility in investing costs, including financing variable margin.
Other gold derivatives, such as options and swaps, may have high transaction costs, especially when liquidating a position. In addition, derivatives may not establish legal ownership of gold—they often represent an agreement by a counterparty to provide a set amount of gold for delivery or dollar value in specified circumstances. As a result, derivatives introduce significant counterparty risk.
Ownership of physical gold requires investors to pay for storage, transport, and insurance. Investors also are subject to markups on purchases and mark-downs on sales. Investing in bullion requires working with a custodian for storage and management—and with every transaction, a representative from the custodian must enter the vault and either deposit the newly purchased gold or remove the gold that has been sold.
The ETF solution
Both clients chose to invest with GLDM® for efficient, liquid exposure to the gold market. GLDM® tracks the LBMA Gold Price benchmark, delivering reliable exposure to changes in spot gold bullion prices without the use of leverage or derivatives.
The investors valued the intraday liquidity offered by the ETF structure, as well as GLDM®’s low total cost of ownership. Its gross expense ratio is 0.10%, and it minimizes trading costs by transacting gold wholesale through Authorized Participants, some of which have seats on the London Bullion Market Association.
GLDM® provides direct exposure to physical gold. The gold underlying the ETF is held by GLDM®’s custodian, JPMorgan Chase Bank, in its vaults in London, New York, and Zurich, in the form of gold bars with at least 99.5% purity. JPM handles all practical and logistical aspects of holding the gold, including measurement, verification, security, transport, and insurance. The ETF’s administrator, BNY, audits GLDM®’s financials and the gold it holds physically at the vault.
Outcome
Both clients experienced smooth transitions to GLDM® with low transaction costs. The ETF provided an efficient, liquid way for them to maintain strategic gold exposure—helping them in their efforts to enhance portfolio diversification and hedge inflation, respectively.