A 4-ETF Combination To Assuage Fears Over The Bar ZJ6752 Fiasco
ETF investing, portfolio strategy, long-term horizon, Investing for Beginners
In response to a previous article featuring two gold-backed ETFs, I first learned about the Bar ZJ6752 fiasco.
Given the fact that all investing involves risk, where might this episode fit into the picture? And what reasonable steps might one take to mitigate such risk?
In this article, I will feature two additional gold-backed ETFs and suggest how the combination of all four ETFs can serve to assuage (dont you love that word?) your fears.
For convenience, I provide links to the website, prospectus, and most recent vault inspection for all four ETFs, such that you can do whatever further due diligence you wish.
Assuage. Dont you just love that word? According to , thefirst meaning of the wordis to make milder or less severe; relieve; ease; mitigate.
In this case, we are referring to fears over what I will call the Bar ZJ6752 fiasco. What is that, you ask? I first learned of this episode in response to a recent article for this platform entitledLooking To Include Gold In Your Portfolio? Think GLD BARs. The title featured a nice play on words; the ticker symbols of two popular gold ETFs substituted for actual gold bars. What that play on words was designed to convey is that, prior to March 28, 2003, investing in gold tended to fall in the realm of specialists, and often was not very liquid, transparent or efficient.
It was on that date that the first gold-backed ETF was launched. For many, perhaps even most investors,gold ETFs offer a viable alternativeto the costs involved with storage and acquisition of physical gold. In my first article, I featured two ETFs with which one could include an allocation to gold in ones portfolio. In the comments section, I was first introduced to Bar ZJ6752.
In this article, I will discuss that episode in some depth, touch on the question of risk as it relates to investing in gold ETFs and, ultimately, feature the following four ETFs for your consideration:
At the time I wrote my article, I had never heard of something known asBar ZJ6752. I learned about it via two separate readers who brought it to my attention in the comments section. There were at least two others who made vague references to something along the lines of having heard that the outstanding shares of these ETFs really arent backed by as much gold as they claim to be.
Before I go any further, please let me make it clear thatnothing I write from this point forward is intended to deride or mock the views of any of my readers. First of all, as a writer, that would in effect be biting the hand that feeds me. Secondly, as I revealed in the article, I recently opened a small position in GLD myself. Naturally, I became genuinely curious as to the assertions and decided to look into the matter to at least a reasonable degree.
What exactly is the Bar ZJ6752 fiasco to which I refer? For some years, skeptics had raised doubts as to whether, in fact, theSPDR Gold Shares ETFactually held as much physical gold as was claimed. Sometime apparently shortly prior to September 1, 2011 (the air date of the piece), CNBCs Bob Pisani was grantedunprecedented access to the secret London vaultwhere GLDs gold is stored.
After a dramatic 30-second opening, the video shows Pisani, his producer, and his cameraman being taken to the secret vault in a sealed, blacked-out vehicle. The next shots reveal them inside the vault. And then it gets interesting. Between the 1:12 and 1:16 mark of the 2 minute, 45 second video, Pisani tilts a gold bar such that the camera is able to zoom in. Clearly displayed is the serial numberZJ6752.
But wait a minute!Intrepid followers of such mattersquickly noticed that Bar ZJ6752 wasnt on the latest list of gold bars supplied by the ETF!
And thus the controversy. After all, if the visit to GLDs secret London vault revealed a bar that did not belong to GLD,what else might be going on?
And this is where I will leave off my summary of the episode. For any who are interested, Ive given you a starting point to follow the trail as far as you personally desire. After all, if you are thinking of investing in GLD, or any other gold-backed ETF for that matter, you certainly want to feel good about your investment.
Lets, however, talk at least briefly about some general concerns raised by the episode featured above.
Naysayers of gold-backed ETFs feature the fact that you areunable to ever take possession of physical gold. This is true. What does an investor in such ETFs actually own? Heres how theprospectusfor SGOL words it:
The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trusts expenses. … The Shares are intended to offer investors an opportunity to participate in the gold market through an investment in securities. The logistics of storing and insuring gold are dealt with by the Custodian and the related expenses are built into the price of the Shares. Therefore, the investor does not have any additional tasks or costs over and above those associated with dealing in any other publicly traded security.
In short, what you are purchasing aresharesin apublicly traded securitythat represent aninterestin the associatedgold bullion.
The other concern that is typically raised relates to the activities of the custodian, the fact that there are typically sub-custodians involved in the process, and thelack of formal contractsin many cases due to the governing English law. Further, in the various prospectuses, it is made clear that there may not be sufficientinsuranceto cover every last possibility and contingency, including with respect to the liability of either the custodian or any sub-custodians. Finally, from the standpoint of a U.S. investor, since all of this is typically covered under the law of a different country, there could well be challenges in filing a legal claim were something to go wrong.
Without diminishing or belittling any of the above, it might be a good time to offer the gentle reminder thatall investing involves risk.
As just one example, in one of the very first articles I ever wrote featuring the benefits of diversification via ETFs, I featuredwhat happened to BPBP) in 2010. Due to a terrible accident in one of its oil rigs in the Gulf of Mexico, and the resulting logistical, legal and other complications, BPs stock lost over half its value between April and June. Today,some nine years later, BP still trades well below its price before the accident.
For any investor, then, the key ismanagingrisk. In general, this is done through diversified portfolios, where no one element is allowed to introduce what might be called a fatal level of risk. As a simple example, an investor interested in oil companies who invested in an ETF which also included Chevron (CVX) and Exxon Mobil (XOM) would have been less affected by what happened to BP than an investor who was all in on BP.
How might all of this relate to an investor who would like to include gold in their portfolio, but who doesnt have the means or desire to deal with the financial and logistical challenges of taking possession of physical gold?
Simply put, one simple thing that investor can do isdiversify. Nothing says that such an investor must invest their entire allocation inone ETF, correct? In my earlier article, I revealed that I myself had chosen to split my allocation between the two ETFs featured in that article.
However, even greater diversification is easily achievable. And that leads me to a discussion of the four ETFs featured at the outset of the article.
Of course, I have already featured two of these in the prior article. For convenience, I decided to start off by replicating the data table I built in that article, but to now include the additional ETFs we will be discussing. This should help you get a nice overview and comparison. I will then offer a brief writeup on the two additional ETFs in this analysis.
: In a spirit of complete transparency and full disclosure, please note that I have included links to the website, prospectus, and most recent vault inspection for each of the four ETFs in the table above. If you want to quickly research anything I discuss in this article, this can easily be done by opening any of the prospectuses and searching for vault, custodian, insurance, risk factors, or similar combinations.
As can be seen in the table above, with an inception date of 1/21/2005, IAU has a track record that goes back almost as far as GLD. Of the four ETFs, it is also the one that comes closest to GLD in terms of size, with just north of $12 billion in AUM. Its expense ratio falls between GLDs .40% and our two low-cost competitors, BAR and SGOL.
Similar to BAR, each share of IAU represents roughly 1/100 of an ounce in gold, so you have to buy 10 shares to reach the same exposure as a single share of GLD.
A couple of items worthy of note. First, IAUs custodian is the London branch of JPMorgan Chase. According to its published materials, it maintains vault locations in London, New York, and Toronto. As of its4/10/2019 gold bar list, however, it only shows holdings in the London and New York vaults, with roughly 76% of its gold in London and the remaining 24% in New York.
Secondly, I found this interesting item in IAUs prospectus.
The Custodian has no obligation to accept any additional delivery on behalf of the Trust if, after giving effect to such delivery, the total value of the Trusts gold held by the Custodian exceeds $50 billion. If this limit is exceeded, it is anticipated that the Trustee, with the consent of the Sponsor, will retain an additional custodian.
In summary, in terms of mitigating risk IAU has, a subsidiary of BlackRock (BLK) as its sponsor, a different custodian than either GLD or BAR, a limit on the size to which the fund can grow before a second custodian is selected, and a portion of its gold stored in a different physical location, New York.
SGOL has an inception date of 9/9/2009. However, prior to October 1, 2018, it was known as the ETFS Gold Trust, and its sponsor wasETF Securities.
In terms of size, with roughly $845 million in AUM, SGOL is much smaller than either GLD or IAU, and a little larger than BAR. The big recent news with respect to SGOL is its expense ratio. Formerly .39% (almost equal to GLD), on December 3, 2018, new sponsor Aberdeen Standard Investmentsreduced the sponsor feefor SGOL to .17%, matching BAR for the lowest expense ratio for a gold-backed ETF.
The other major difference, though, is the location of SGOLs vault, in Zurich, Switzerland. Heres how SGOL references this in its prospectus:
Location of Gold Vault. The Trusts custodian holds gold bullion in a secure vault in Zurich. This custodial arrangement differentiates the Trust from other Gold ETPs, which may custody gold in locations such as the United States, Canada, the United Kingdom or Singapore or which may use financial instruments to seek their investment objectives.The geographic and political considerations of owning gold in Zurich may appeal to certain investors. (Bold mine)
Thats a very understated way of saying that, for a variety of reasons, gold stored in Zurich is probably about as safe as anywhere on earth, due to Switzerlands long history of both political neutrality and financial privacy.
It is my hope that this article has covered, head-on concerns that are raised with respect to investing in gold-backed ETFs.
What about the Bar ZJ6752 fiasco? I will let you do your own research if you care to do so, and come to your own conclusions about what might account for that. At the same time, consider the serious responsibilities devolving on the sponsor, trustee, custodian and any sub-custodians, together with the framework of law under which they all operate. Take a close look at the auditing protocols. And, again, draw your own conclusions. For what I might describe as a middle of the road take on the whole thing, you might considerthis article from Forbes.
However, I have also offered you another option to consider. To make it easy, lets say that you wish to include a 5% allocation in gold in your portfolio, and you wish to take advantage of the ease and relatively low cost with which gold-backed ETFs allow you to do so. You could do so by allocating 25% of that amount to each of the four ETFs I suggest here.
If you did so, your 5% allocation to gold would be diversified across:
Lastly, I would recommend that you consider this article along with my articleIn Search Of The Perfect Portfolio For The Next 10 Years. None of us can completely avoid risk. But, if you build a portfolio around these principles, if there ever turns out to be such a thing as a financial Armageddon, you have given yourself a fighting chance to come through it far better than most.
I look forward, as always, to reading your comments.
Disclosure:I am/we are long BAR, GLD.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure:I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.