Better way to own Gold?

John Koch Senior Investment Analyst |

The current market environment seems like a perfect time to own gold. We are seeing elevated inflation accompanied by slowing economic growth and uncertainty regarding interest rates, the Federal Reserve, the debt ceiling, the US dollar, and much more. Gold has historically been viewed as a safe haven asset that investors have sought during times of uncertainty such as this.

But what is the best way to own gold? Obviously, you could own physical gold, like coins, jewelry, etc. This can be expensive with a very high premium over spot gold and state sales tax (in many states). Physical gold can also be a nuisance, because you need a safe place to store and ensure the gold, not to mention the trouble involved should you decide to sell it. Fortunately, there are many mutual funds and ETFs that offer exposure to gold bullion.

The oldest and largest ETF that offers exposure to physical gold bullion is the SPDR Gold Trust ETF (GLD). It has gathered a tremendous amount of assets since its launch in 2004, currently over $60 billion. Many competitors have come to the market since 2004 that offer the same basic exposure to gold. What GLD and its ETF competitors all have in common is the way they are taxed. They are all taxed as collectibles with a maximum 28% long-term capital gain rate. This differs from most other ETFs which usually come with a maximum 20% long-term capital gain rate.

There is an interesting way to gain access to physical gold without worrying about a higher capital gains rate. This can be done through the closed-end fund structure. (Closed-end mutual funds differ from traditional open-end mutual funds because they will not issue new shares as more investors buy into the fund. Here is a full breakdown from Fidelity highlighting the differences between open and closed-end funds). Specifically, the way to do this is through Canadian closed-end funds. The Sprott Physical Gold Trust (PHYS) is taxed as a foreign investment as opposed to a collectible, so it does not carry the 28% long-term rate GLD does. Additionally, the expense ratio of PHYS is in line with that of GLD at 0.41% vs. 0.40%.

iSectors utilizes PHYS and other precious metals closed-end fund and ETFs within the iSectors® Precious Metals Allocation. This is a strategic, long-term allocation model that has been able to take advantage of the tax benefit mentioned here, while also offering exposure to other complementary precious metals in a liquid and transparent format. If you have questions about this model or precious metals in general, please do not hesitate to contact us.