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July 08, 2010 |
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iShares Gold Price Cut A Boon To Advisors |
(Dow Jones) The chief beneficiary of investors' current interest in gold funds has
been the $50.6 billion SPDR Gold Shares. Now BlackRock Inc.
is making a serious bid to change that.
The company last week slashed fees on its own nearly
identical but far less popular $3.3 billion iShares Comex Gold Trust by more than a third. The move means that for many financial
advisors and Main Street investors, the iShares gold exchange-traded
futures could be a better option, at least to those who are in it for
the long haul.
However, sticking with SPDR Gold Shares probably makes sense
for those who plan to trade frequently or who already own the security,
since selling a position may provoke a tax hit, analysts say.
BlackRock's move makes a "compelling case," says Morgan Stanley ETF Analyst Dominic Maister.
Although the change seems unlikely in itself attract a new
wave of investors to gold ETFs, such pricing tactics have been used by
ETF firms like Vanguard Group and Charles Schwab Corp. to entice
investors away from otherwise dominant offerings.
For months, gold has been one of the hottest investments,
surging 9% so far this year to $1,196 an ounce even as the stock market
tumbled. Considered more convenient than coins or futures contracts,
gold ETFs have been popular with investors ranging from mom and pop to
sophisticated hedge fund firms like Paulson & Co., the SPDR Gold
Shares' largest holder according to regulatory filings.
Before last week, the SPDR and iShares gold ETFs both
charged investors the same annual investment fee of 0.4% of assets. A
third competitor, the $587 million ETFS Physical Swiss Gold Shares, undercut them slightly at 0.39%. BlackRock's new fee is 0.25%.
For investors that buy gold as a long-time holding—as a
hedge against inflation or because its price tends not to move in
conjunction with stock prices—that change could make a big difference.
For instance, if the coming decade is as good to gold prices as the
last one, with the metal returning about 16% a year, then buying
$10,000 worth of gold now and holding it for 10 years would cost about
$1,700 in the SPDR ETF and only $1,100 with the cheaper iShares
version, according the Securities and Exchange Commission's mutual fund
expense calculator.
Still, the lower price doesn't make the iShares ETF a slam
dunk. For one thing, a 16% annual return represents a remarkable bull
run. A less dramatic performance would mean smaller savings in dollar
terms. Moreover, ETF investors also have to figure in trading costs
that can easily trump investment fees for those who do a lot of buying
and selling.
While both ETFs are heavily traded, the SPDR Gold Shares is
much more so, with about $1.9 billion worth of shares changing hands
each day, compared to just $35 million for the iShares version. While
trading costs are more difficult than investment fees to measure,
investors generally prefer it when their own trades represent just a
small sliver of an ETF's daily volume, ensuring there will be lots of
other sellers if they want to buy, or buyers if they want to sell.
In addition to worrying about getting a good trading price,
investors that trade gold ETFs also pay brokerage commissions. A number
of iShares ETFs can be traded for free online with Fidelity
Investments, but the gold ETF is not on the list.
Finally, although the iShares ETF's low fees may be
attractive for long-term holders, many existing investors in SPDR Gold
Shares won't want to sell shares for tax reasons. Investment gains on
gold ETFs are taxed like collectibles, meaning investors pay ordinary
income tax rates up to 28%, according to Morningstar ETF analyst Scott
Burns.
"Incurring that gain is going to swamp the [fee] cut," he says.
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