ETF's as Gold? or ETF's as anything for that matter?

[doug6zj9]

I remember reading some commentary last year, during the acute phase of the credit crunch, questioning the safety of ETFs in general, as representative of anything underlying.  It seems that there was real fear of counter-party risk across the whole class of investment.  In other words, they weren't even good enough for paper assets let alone gold!  IF HB were alive, what would Harry say? 

[craigr]

Exchange Trade Notes (ETNs) are a bigger risk than ETFs. With ETFs the managing company cannot promise the assets to creditors from what I understand (just like a mutual fund). The assets are legally separate. With ETNs the issuing bank going under means the ETN is in big trouble.

ETNs should all be avoided (some commodity funds are really ETNs underneath for instance). Here is an article that discusses the problems with ETNs and counter-party risks:

http://www.usatoday.com/money/perfi/col ... otes_N.htm

Gold ETFs could have a counter-party risk if they are doing things behind the scenes like leasing their gold out, etc.. It's just a balance of risk vs. convenience for an investor on whether to use an ETF or not. Other ways of holding gold have their own risks as well. But part of the reason Browne wanted more control over the gold is for precisely this reason of counter-party risk. He considered gold an asset of last resort and wanted as few people and pieces of paper between the investor and it as possible.

[MediumTex]

I think HB would say that bullion is better than an ETF and an ETF is better than nothing.

People act like these ETFs are scams, but I don't see the market pricing in anything like that.  For example, the spread between GLD and IAU never budges more than a couple of pennies.  To me, that means that the market either thinks that both games are clean, or that both games are equally dirty.  Since I have never seen a market price in the exact same amount of crookedness in two different otherwise identical investments (one investment is always perceived as more crooked than the other), the conclusion I draw is that it is likely that GLD and IAU are both more or less legitimate.

Looking at the ETF issue from another angle, if GLD is not a clean game, then why did Soros take a big position in it recently?  Wouldn't Soros have better market information than anyone?  If GLD wasn't clean, it seems like Soros would load up on bullion and short GLD while spreading all the rumors he could.

I think there are some good reasons not to own PM ETFs (fees, tax inefficiency, theoretical counter party risk, etc.), but I think most of them are not nearly as exciting as a lot of gold dealers would like you to believe.

I'm not saying that there isn't counter party risk with the PM ETFs, but there is counter party risk in almost everything you do in life--marriage, for example, has enormous counter party risk, but that doesn't mean that you shouldn't get married (though I would encourage due diligence). 

I do think that bullion is easily superior to the PM ETFs, but in an example such as someone who is only working with tax deferred accounts, using a PM ETF (or two) doesn't seem like a crazy thing to do.

To me, the goal should always be to build a personal PM holding in bullion, and any ETF holding should be viewed as a temporary arrangement until you can move into something more permanent and tangible.  Gold ownership is a funny thing--at first it feels very strange and you wonder if maybe you just did something really dumb.  After owning it a while, though, it's hard to imagine not owning it as part of a balanced portfolio. 

I think many people you hear speaking negatively about gold have never owned any themselves, and thus what they are criticizing is actually (to them) just an abstraction.  It's sort of like someone who has never been to Texas talking about what a terrible place it is, based upon what they read somewhere or what someone told them. 

[Pkg Man]

Gold ownership is a funny thing--at first it feels very strange and you wonder if maybe you just did something really dumb.  After owning it a while, though, it's hard to imagine not owning it as part of a balanced portfolio. 

Very interesting.  I purchased my first gold coins about a month ago, before I had discovered the PP, and I immediately felt the same way.  There's something about it's history as a store of value that has stood the test of time that makes it a very unique asset to own.

[doug6zj9]

Gold ownership is a funny thing--at first it feels very strange and you wonder if maybe you just did something really dumb.  After owning it a while, though, it's hard to imagine not owning it as part of a balanced portfolio. 

Very interesting.  I purchased my first gold coins about a month ago, before I had discovered the PP, and I immediately felt the same way.  There's something about it's history as a store of value that has stood the test of time that makes it a very unique asset to own.

Dittos 

[Roy]

Gold ownership is a funny thing--at first it feels very strange and you wonder if maybe you just did something really dumb.  After owning it a while, though, it's hard to imagine not owning it as part of a balanced portfolio. 

That says it, Tex. 

I think Gold is what defines the PP in the minds of many peeps, even as 25% sits also in LT Treasuries.  For some considering the PP, it is both the idea of Gold and the comparatively "massive" weighting to it that is troubling, whether holding physical metal or ETFs.

You can find PM or CCF holdings in many conventional portfolios, but the portion typically used is little more than a dollop and PMs might be just a sprinkling of that.  (Swedroe, for example, has mentioned using about 10%—of only his equity portion—for CCFs and he is a huge supporter of them) 

Gold also seems plain mysterious for some. And with that mystery comes doubt, reasonable or not, as to the things that might happen to 25% of one's portfolio.  I believe that with education, familiarity with holding it, and if the sky does not fall, one can get accustomed to Gold taking up residence in a quarter of the house, maybe even pleased with its residency.  But it is often the first concern mentioned when some consider the PP.

Roy

[Quasimodo]

Here's an article recommending one of the Canadian closed end investment companies CEF or GTU as a precious metals investment with less counterparty risk than the ETFs GLD or SLV:

http://www.goldstockbull.com/articles/c ... -own-gold/

John

[craigr]

Here's an article recommending one of the Canadian closed end investment companies CEF or GTU as a precious metals investment with less counterparty risk than the ETFs GLD or SLV:

http://www.goldstockbull.com/articles/c ... -own-gold/

John

John,

These funds have come up in the past and I have to admit I know little about them. However as I research them I'm beginning to think they have some interesting aspects vs. the big player ETFs. I like the fact that they have been around for so long (40+ years). I also like the fact that they are restrictive as to the activities that can happen behind the scenes with respect to their holdings. I also like the fact that the gold is being stored in another country for geographic diversification away from US financial centers. Finally, they have a competitive expense ratio.

I am thinking that GTU is the best choice for the portfolio as it is a gold only trust. The other issue with this fund that people bring up is not buying it when the premium is too high. Those looking to find the current premium on this fund can use this link:

http://www.cefconnect.com/Details/Summa ... ticker=GTU

Or from their actual website here:

http://www.gold-trust.com/asset_value.htm

As of today around 9-10%. It's been as low as 1.6% and as high as 32.99%!

I am still thinking about this as I've never owned a closed end fund before. The premium over NAV is something I'm not used to seeing and still trying to get my head around. Do others equate this with basically the dealer mark-up of physical bullion? Is that the best way to value whether the premium is fair or not?

The website for the trust is here:

http://www.gold-trust.com/

[Quasimodo]

Craig, here is a link to a new silver bullion fund that is managed by the same people and actually trades at a slight discount to nav;

http://www.silverbulliontrust.com/

My amateurish take on the premium for the Gold Trust is that over time, as one periodically rebalances the holding, it is probably a minor issue.

John

[rickb]

The premium over NAV is something I'm not used to seeing and still trying to get my head around. Do others equate this with basically the dealer mark-up of physical bullion? Is that the best way to value whether the premium is fair or not?

The premium (or, theoretically, discount) for GTU is simply the difference the market is willing to pay per share vs. the NAV per share.  I think it actually runs as high as it does because of the US tax treatment (long term gains are taxed at the capital gains rate of 15% rather than at the collectibles rate of 28%).  The only relationship this has to dealer markup of bullion (and Craig may have gotten this notion from me) is that in both cases you're paying more than the NAV of the bullion you're buying.  However, unlike dealer markup on bullion the GTU premium is not profit that's going into anyone's pocket.  If the premium for GTU is, say, 10%, you can buy shares at NAV+10% and immediately sell them at NAV+10%, paying as transaction costs only what you pay to buy and sell stock.

The article linked by Quasimodo has a long reply describing the issuance of additional shares of GTU and the effect this has on the NAV, which I think is basically correct.  Essentially if the current premium gets higher than it "ought" to be (for whatever reason), additional shares are created and sold to some sort of insiders at a lower premium but still more than NAV.  This is very much like how baskets of additional assets are created for ETFs, except the frequency is far less and (in the case of GTU) the basket price includes a premium.  The price of the additional shares (to the insiders) is NAV+premium, where the NAV is the spot price of the additional bullion that's purchased (keeping the ratio of shares to bullion constant) and the premium covers the transaction costs paid by the fund plus additional money used to pay ongoing expenses.  The price paid by the insiders is published, which tends to make the premium the market is willing to pay drop to whatever the insiders have paid (at least temporarily).

I don't know whether it's ever happened, but I assume the same process could happen in reverse if there were ever a large discount - i.e. the fund would sell bullion to insiders at a smaller than current discount but at some discount to prevailing bullion prices.  This would presumably work exactly the same way and reduce the discount to whatever discount was offered to the insiders.

I think the bottom line is whether the premium is fair has nothing to do with its relationship to the prevailing dealer markup.

[6 Iron]

I am still thinking about this as I've never owned a closed end fund before. The premium over NAV is something I'm not used to seeing and still trying to get my head around. Do others equate this with basically the dealer mark-up of physical bullion? Is that the best way to value whether the premium is fair or not?

The variable premium over NAV was for me the largest factor in not selecting GTU as the ETF I would use for rebalancing. I was concerned that it would add an additional variable that may inappropriately influence my decision to postpone rebalancing (or prematurely do so).  Aside from this, the fund prospectus does look attractive.

(edited typo)

[cvn74n2]

The other problem I have with GTU (and other Closed End Funds) is the fund manager can add additional shares to the market at NAV (not market price) at anytime, adding another variable to the price differential between NAV and market. 

[Roy]

Some older vids but interesting points:


http://www.youtube.com/watch?v=1kg7tcnP ... re=related

http://www.youtube.com/watch?v=y5JP3S3zJbw

Now, it would be harder to make fake Kruggerands, say, but still...


Disasters on ETFs may drive (real) bullion up but problem always is that where would your physical Gold be held?  And at what costs?  Overall, I'd not be heavily invested in ETFs, just enough perhaps to rebalance easily but not more than that. 

Roy

[MediumTex]

I just realized that I have real problems with ETF's (and not just GLD) and cannot get myself to use them as investment vehicles.  After reading, researching, reading, scanning the Internet, and more research I cannot help but feel that there's something out there I'm not being told about ETFs...  I know that FEELINGS shouldn't guide our investment decisions, so can anyone convince me that ETFs are the Second Coming of Sliced Bread everyone makes them out to be?

My goal is to reduce my total ER (Currently at about 70 bps with PRPFX+EDV) and Vanguard ETFs would accommodate such a goal.  A few regular old Indexes would serve the same purpose, but it seems that PP'ers prefer ETFs (second, of course, to physically held assets).

If it's a non-issue really, then I'll go with my gut and use VFINX, Treasury Direct/Vanguard Bond Desk for Long Bonds & I Bonds, and Bullion Direct for gold.  Any issue with that setup for someone like me looking for lower expenses and wary of too-good-to-be-true ETFs?

IMHO, you're probably more concerned about ETFs than you should be.

I don't see ETFs as the second coming of sliced bread, but they are good investing tools.  Also note that ETFs come in all shapes and sizes.  To me, the double and tripled leveraged ETFs (SKF, FAZ,etc) and the commodity contract ETFs (USO, UNG, etc) are pure garbage.  OTOH, ETFs like EDV and TLT that merely hold a class of assets with low management fees and virtually no "decay" are good tools for investors who need that type of exposure.

Do you own due diligence, of course.

[doug6zj9]

This sort of article is what causes me to wonder what might happen if things get chaotic in financial markets.  

http://www.cnbc.com/id/39309280

[MediumTex]

...what might happen if things get chaotic in financial markets.  

This is just a general point, but I think it may be useful: no two chaotic episodes are ever the same.  Thus, preparing for or imagining what one might do if the last chaotic episode occurred again is not normally a good investment of time and energy.  The next chaotic episode is normally so different from the last one that it presents an entirely new set of challenges.

Take for example the last extended chaotic episode in the U.S. economy prior to 2008--it was an extended period of inflation, high interest rate and weak economic growth in the 1970s.  People came out of that period swearing that inflation would never catch them by surprise again.  For the next 30 years some people continued to prepare for another inflationary episode, assuming that was the worst thing that could happen.  Then came 2008, and--SURPRISE!--the chaos came from a financial crisis and a set of deflationary forces.

Another thing to keep in mind when looking to the future is to remember that even if an episode IDENTICAL to 2008 were to occur again, it would still be very different because we would all react to it differently.  It's very hard to terrify/shock/upset a large group of people to the same degree with a similar event more than once.  As an example of this phenomenon, the U.S. has lost two space shuttles in the history of the program--the first was a national tragedy, the second was a passing news story.

[MeDebtFree]

This sort of article is what causes me to wonder what might happen if things get chaotic in financial markets.  

http://www.cnbc.com/id/39309280

I read the article at the link and also the actual report.  This sort of stuff scares the daylights out of me (clearly not the same thing but I was unlucky enough to be one of the losers in the Reserve Primary Fund fiasco).  This is making me re-think my use of ETFs.  I am middle age and have a lot of $$ wrapped up in these things.  For me the Reserve Primary Fund thing was an emotional nightmare for quite a while....a collapse of one of the big ETFs I hold would be MUCH worse.

All this ETF naked short selling and/or producing more shares out of thin air is just more financial shenanigans that can't lead to anything good.  And you can bet your sweet bippy if it were to happen that individual retail investors will be last in line to get any crumbs that may be left over.

Here are some articles that defend against the possibility of ETF collapse.

http://seekingalpha.com/article/226958- ... t-collapse

http://fridayinvegas.blogspot.com/2010/ ... art-i.html

I'm not sure I fully understand but it seems to me that in order for everyone to be made whole, those shorts would have to come up with cash to cover all those virtual shares (and I assume the cash needed would be way beyond the collateral they originally put up).  So, sure seems to me that someone would indeed be left holding the bag.

I would love to hear everyone's thoughts on ETF safety, fact or oxymoron

-MDF

[craigr]

Overall I think that open ended mutual funds like what Vanguard offers are safe and transparent in how they operate. They are not open to market abuses as an ETF may be. The mutual fund concept has been around a lot longer and have many decades of experience handling market problems. Even though ETFs are relatively new they have shown good robustness over the past decade with the 2000-2002 crash and 2008 however.

If you follow Harry Browne's advice you should try to limit the number of middle-men and complexities in any investment. This is why he recommended a simple index fund for stocks. He also advocated owning bonds directly if you can and not in a fund. Gold as well should be owned directly if you can and not through a fund. Cash should be held in a money market fund that only invests in Treasury bills. You want to have each component as simple and easy to understand as possible.

Lastly, it is my understanding that naked shorting is illegal. So I'm not sure about the validity of these reports and need to investigate further.