All To Know About The SPDR Gold Trust
Gold is a very unique asset since ancient civilizations. It was a symbol of wealth for those who owned it at the time, and it played an enormous role in the cultures, norms, and traditions of many people.
The economic forces that determine the value of gold are not the same forces that determine the value of other commodities. This makes investing in gold a different ball game.
You can invest in gold by buying the actual metal itself, or you can simply buy shares of companies that mine and produce gold or are in the gold business. This can be done by buying gold futures or investing in gold exchange-traded funds (ETFs).
One of the easiest ways to own gold shares and gain exposure to gold trading is to invest in gold ETFs. In this review, we’ll talk about the SPDR Gold shares and why you should invest in gold using this platform.
SPDR Gold Shares
It is like a mini-portfolio of stocks and derivatives that aims to replicate an index, commodity, or strategy. It offers you a cheap and innovative, yet easy way to access the gold market. SPDR is one of the largest gold exchange-traded fund (ETF) in the world.
Originally listed on the New York Stock Exchange in 2004, SPDR also trades on the Singapore Stock Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, and the Mexican Stock Exchange.
The objective of the SPDR investment is to monitor prices and reflect the performance of the most actively traded indices and commodities, including gold bullions on the market. The Trust holds bullion or physical gold bars and from time to time issues them for deposits.
Most investors would like to be in possession of physical gold as a hedge because they believe that the shares are a cost-effective option for investing in gold. Other investors may also use this bullion as a means of diversification of portfolios.
Buying and storing gold with SPDR not only gives you ownership of shares in State Street's gold bullion trust, but it could also be very expensive to buy, as the fund aims to provide investors with lower-cost methods of owning and storing this priced commodity.
Shares are liquid and easy to buy and sell at the prevailing market price at any time. Investors cannot convert these shares into physical gold; however, the fund will issue baskets in exchange for gold deposits.
Few can complain about the long-term track record of the SPDR ETF.
The past 10 years has seen its stock rise among satisfied investors as the compounded annualized return of SPDR has consistently waited above 13%, and its 5-year and 3-year return have been documented to be at 10.75% and 11.15% respectively, despite the inherent volatility that time exposes investments too.
Indeed, the market crash at the beginning of March 2020 had a surprisingly minimal impact on its performance, only offering a drop to 7.26% on its 1-year return since then, and a negative 1.48% on its year-to-date return.
How does GLD Track Gold?
GLD reduces the difficulty of buying, storing, and securing physical gold bullion for investors. It tracks the gold spot price by holding gold bullion in a trust using gold bars held in an allocated London vault account.
Physical bars are secured by the custodian's vault in London or by other custodian's vaults.
Funds are generally impacted by tracking errors. This is a term used to refer to the difference between the return fluctuations of an investment portfolio and the return fluctuations of a chosen benchmark.
In this case, there is a difference between the ETF price and the underlying spot price of gold. Tracking errors are normal to the operation of funds that are most likely to result from a fund tracking benchmark. This is mainly due to the costs of managing the fund, transactions, costs and whether there is cash in the fund.
The SPDR fund has an annual tracking error of 0.89%, and the GLD shares are bought by the Trust for the fund in baskets (otherwise referred to as groups of shares) of 100,000 shares.
The Trust transfers these shares in baskets to authorized participants who are most often large financial institutions from time to time.
Baskets are offered at the net asset value (NAV) on days that orders to create a basket are accepted by the trustee. Net Asset Value can be defined as a company’s total assets minus its total liabilities.
The shares are then sold to the public at the prevailing market prices for gold and the ETF. GLD's NAV has a much larger handle, which translates into more gold exposure per share. It held 37.2 million ounces of gold with a market value of around $64.6 billion on June 19, 2020.
World Gold Trust Services and the marketing agent, State Street Global Markets, are the sponsors of the ETF. GLD shares are bought through financial institutions that are responsible for securing the assets needed to develop ETF shares.
The trustee of this fund is the SPDR Gold Trust, while the custodian of the physical gold is HSBC Bank, which is responsible for the sourcing and storage of the gold. This custodian can as well employ other sub-custodians to source and store the gold.
SPDR is one of the most visible and physically large companies in the industry.
SPDR gives out a number of popular ETFs from funds that track the major stock indexes to fixed-income ETFs. The Trust’s gold bullion is securely locked away in the vaults in London.
The Nature and Characteristics of the Fund
GLD was the first market to participate directly in the investment of physical gold. GLD essentially tracks gold prices for investors and gives them a chance to be exposed to the movement of gold prices.
Its structure reduces the difficulties that investors face when buying, storing, and securing physical gold bullion.
Making an investment in gold ETF, however, does not mean you own the gold in reality. Instead, the fund holds gold derivative contracts that are backed by gold for the investors.
GLD started trading gold in 2004 and has since become a sought-after market for the trade of the commodity. The fund has an expense ratio of 0.40%, though some other gold ETFs like iShares and a few others have lower expense ratios.
GLD trades on the NYSE, and as of mid-2020, GLD had net assets of about $62.4 billion and a one-year total return of about 14%. To buy shares in this fund, investors can make use of any brokers they prefer.
How suitable is GLD?
Before making if they are suitable for you, you should consider certain aspects like asset allocation, diversification of choices, risk tolerance, and timing.
GLD makes it much easier for investors to buy and sell shares of the ETF than buying the physical gold itself. Not only would you have to worry about carrying and securely keeping the gold without security risks, but you’ll also have to pay fees and charges too.
GLD shares are much more accessible for most investors than holding gold futures contracts. Gold futures are legally binding contracts between a buyer and seller to exchange gold commodities at some point in the future.
These contracts involve a substantial amount of leverage, which can magnify profits and losses according to market activity and currency exchange rates.
Investors also use GLD for portfolio diversification. Investing your money in different assets and securities can help minimize the risks of the portfolio. The fund has a low beta of around -0.02 compared to the average of 0.32 in the market.
It does not always follow the market trends and movements, as it is common for gold commodities. This makes it a very good fund for the diversification of stocks and other assets.
However, investors should be wary when investing on a long-term basis in the fund. This is mainly because GLD is regarded as a collectible by the Internal Revenue Service (IRS).
It taxes high rates of amounts on profits made by investors as opposed to the normal rates. It is the major downside of GLD, and investors can avoid this by either exiting any of their positions in less than a year or by holding the shares in some other account that is not high on taxes.
How to Get Started
Investing in gold stock is quite easy. Simply open a gold stock and ETF account using your mobile phone or computer. Download the broker of your choice. Navigate through the site to open a ticket and start investing.
It’s really that simple.
How to Use Gold ETFs
Investors can use gold ETFs to shield their portfolio against economic fluctuations, devaluation of currencies, and deeps in the stock market. You can also use gold ETFs to virtually own gold without incurring the risks of having them physically.
It is also easy for diversifications if your portfolio has assets that may be exposed to dollar rate fall when gold rises. ETF helps to protect you from such exposure. It can also protect you from exposure to high rates of the dollar when you sell gold.
The good news is that gold has always held its value even in times of economic instabilities and financial situations because it is not operated as the general stock market.
Risk Management in SPDR ETF
Diversification of assets is a very important risk management strategy that investors use to protect their stocks.
It is not advisable for you to invest all your resources in one stock or ETF because it poses huge risks of losing everything if the market goes bad, and there will be nothing left for you to reinvest.
It is important to spread out your investments to reduce these risks and build a more diversified portfolio.
Investing for the long term is also another strategy that helps minimize risks. Fluctuations in the price of stocks may make investors panic and make the wrong decisions.
This mostly happens to investors with short term plans. If you invest for the long term, such temptations and hurried emotional decisions will not move you because the market values are always bound to fluctuate.
Alternative Gold ETFs
There are other gold ETFs you can choose from, but always make sure you choose the right one for your investment. You can do this by researching and studying the performances of different funds.
Always endeavor to take your time to see how they operate before making the choice of the right one for your investment needs.
Some of the most popular ETF alternatives are iShares Gold Trust ETF, Invesco DB Gold, and the Aberdeen Standard Gold ETF. The differences between each ETF could range from a lot of factors like expense ratios.
For many investors, owning gold could be a good way to diversify their portfolio and prevent the risks of market changes, inflations, deflations, and currency devaluations.
However, buying the right form of gold would go a long way to protect your investments. This can be done by buying gold stocks and owning virtual gold. GLDs are used to track and observe the performance and value of gold in the market at every point in time.
Buying SPDR gold-stock guarantees ease of buying and selling gold in the gold market, and it is an alternative way of purchasing physical gold.
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