“Taxes should never be the tail that wags the dog,” Geraci said. “ETF taxation is something that every investor should be aware of, but I don't believe the higher tax rate for physical gold ETFs should be the sole reason investors look toward gold mining ETFs.”
Gold stocks tend to outperform bullion when gold prices are rising and underperform when prices are falling, said Brandon Rakszawski, vice president of ETF product management at VanEck. That’s because mining costs tend to rise more slowly than prices, allowing miners to boost their profits and potentially pay out more to shareholders via dividends. However, the same is true in reverse: Costs fall more slowly than gold prices in downturns, weighing on profitability.
“Gold stocks are very much tied to gold but come with their own set of risks and considerations, and taxes is just one of those,” Rakszawski said.
VanEck’s own funds illustrate the point: The VanEck Gold Miners ETF (GDX) is up 18% year-to-date, while the bullion-backed VanEck Merk Gold Trust (OUNZ), which is one of a few in the world that allows investors to take delivery of gold bullion in exchange for their shares, has gained 5%. By comparison, the S&P 500 Index is down 5%.
Last year, when the S&P surged 27%, GDX fell 11% and OUNZ lost 4%.
Ultimately, investors should take into account the total cost of owning an ETF, including fees and commissions, when deciding how to invest.
“The lowest-cost physical gold ETF you can find backed by a solid sponsor, that's your best bet if you've been bitten by the gold bug,” said Ben Johnson, director of global ETF research at Morningstar. He also suggests people buy products backed by physical gold through accounts like IRAs, some of which defer taxation until retirement.
This article was provided by Bloomberg News.