Is Cheaper Better for a Gold ETF?

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"GLD demonstrates most impressive rise in commodity space."

One of the most interesting developments in ETFs over the last several years has been the extent to which investors embraced these securities to add commodity exposure to traditional stock-and-bond portfolios. Within the commodity space, no single fund has enjoyed a more impressive rise than GLD, which took in more than $7 billion in the first two quarters of 2010 and finished June with total assets of ~$52 billion. That makes GLD the second largest U.S.-listed ETF by total assets.

But GLD isn't the only physically backed gold ETF on the market; ETF Securities' SGOL has ~$600M in assets, while the iShares COMEX Gold Trust (IAU) finished June at about $3.4 billion. Impressive totals, but they look downright tiny next to GLD.

If iShares has its way, it might not stay that way for long. In the latest shift in the ETF competitive landscape, iShares announced it is slashing the expense ratio on IAU from 0.40% to 0.25%, making its fund more attractive than GLD from a cost perspective. iShares appears to be giving up short-term revenue in hopes of building a more substantial asset base behind its gold ETF (see Five Head-to-Head ETF Matchups).

It's an interesting move, but it remains to be seen just how important a slightly lower expense ratio is for investors. The additional 15 basis points charged by GLD works out to about $1,500 annually on a $1M investment, thus the impact for most investors will be relatively minor. It's unlikely that existing GLD investors will start pulling out and heading to the cheaper iShares alternative, but investors looking to establish a position in gold will likely gravitate towards the ETF that gives them the highest bottom line return.

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