The Best Gold ETF For Europeans
Are you a looking to include a gold ETF as part of your portfolio?
As a European investor, you’ll find that it’s much harder when it comes to ETFs than for U.S. Investors.
When it comes to gold, it is even more complicated.
U.S. investors have GLD, the biggest gold fund in the world as a “go-to” and a couple of other great options such as IAU.
European investors, on the other hand, have many options. There are a lot of gold ETFs listed in many different European countries and currencies.
This can be intimidating to say the least.
And if you’re on this post, you’ve probably already started your research and are considering the largest European Gold ETFs in terms of Assets under Management (AUM).
But many of these come with disadvantages, which are not always easy to identify (unless you read the fine print).
In this post, I will show you how to find the best gold ETF for Europeans and provide my verdict on the best choice.
I will not only feed you the gold ETF “fish” but, more importantly, will also teach you how to fish.
Especially since some of the information on the options available to you might be out of date by the time you read this.
If you’re as excited as I am, then please bear with me as I quickly go over the case for investing in gold and gold ETFs. It’s not just a regurgitation on gold as a hedge to inflation, I promise.
We will then quickly move on to our gold ETF treasure hunt!
Why invest in gold and gold ETFs
As you probably know, gold is one of the best, if not the best, hedge against periods of incredible market turmoil.
Gold is unique in the sense that it’s been likely, historically at least, to protect you against both inflationary environments and deflationary environments.
More generally, gold protects you when you most need protection. When confidence in the economy, governments, fiat currencies or continued peace is at its lowest.
This is why many renowned investors such as Ray Dalio, David Einhorn, Stanley Drukenmiller, John Paulson and many more, recommend having an allocation to gold in your portfolio.
And let’s tie this to income investing, because there is indeed a link. This is Here Income after all.
What is better than having cash on hand to invest into depreciated assets when “there is blood on the streets”?
The answer: having nicely appreciated gold on hand to rotate into the best types of income investments.
While the safest way to hold gold is in physical bullion that you can readily have access to. This approach is expensive, illiquid and impractical.
Buying physical gold bars directly usually commands a substantial premium to the spot price, is harder to sell and is costly and/or impractical to safely store.
Physical bullion would definitely be invaluable in an “end of world” or “World War 3” scenario but in this case we would have many other things to worry about.
Bar this scenario, the most practical, easiest and safest way to obtain direct gold exposure is through a gold ETF.
Characteristics of a great gold ETF
Before we start sifting through the different options available to European Investors and identify the best candidates, I want to highlight the characteristics of a great gold ETF: Namely, that
- The gold ETF is 100% backed by physical gold whereby investors ultimately own shares of the stored gold bullion
- The gold held by the ETF is stored in a favorable jurisdiction and safe location.
- The gold ETF has all the other characteristics of a good ETF (decent size, reasonable fees, low tracking error, liquidity, etc.)
I want to highlight a few aspects regarding the second point on favorable jurisdiction and safe location.
You see, gold is incredibly important to governments and central banks, particularly in times of crisis and many countries have imposed restrictions on gold in the past. Some governments have even previously confiscated gold from citizens.
- In 1933, the U.S. issued Executive Order 6102 requiring everyone living the U.S. to turn in gold coins, bullion and certificates.
- During World War II, the British Government ordered all citizens to sell their gold to the treasury.
- In Australia, Part IV of the Banking Act 1959 allowed for the government to seize private citizen’s gold for fiat currency. It has since been repealed.
- In Germany, as of the 1st of January of 2020, the limit to buy gold anonymously dropped from €10,000 to €2,000
And I’m sure there are more.
The main point here is that it’s important to keep jurisdiction and location of your gold in mind when you invest. If you value safety that is, as I do.
I did a quite a bit of digging and the safest countries for storing gold that kept coming up were Switzerland and Singapore. I’ve seen quite a few references to New Zealand, Austria and the Cayman Islands as well.
I encourage you to do your own research on this topic. Make sure to check many different sources.
OK, enough with the background information. Let’s dive right in!
Gold ETFs in the European Union
There are many websites to research ETFs but my favorite one as a European investor is justETF.com because it is European focused (HQ is in Germany) and allows you to research ETFs based on your location or the European country you select.
Let’s take a look at the list of available European Gold ETFs to investors (if you’re following along on justETF.com, select Germany as your location, results for France are almost identical as well).
This list covers the main funds with over 2 billion in assets:
You may be tempted to start with those that have the largest fund size.
But there’s something you should know…
Notice that you don’t see the word ETF in any of the fund names?
In the EU, there are no ETFs for investing in a single commodity such as gold because, according UCITS fund rules, ETFs should ensure some level of diversification and may not hold any physical commodities.
So essentially, all the single commodity index funds in Europe trade as Exchange Traded Commodities (ETCs). And there’s a key difference between an ETC and an ETF.
An ETC is actually an obligation, or debt note or bond with an underwriter (such as the ETF provider), that is collaterized against a commodity.
Instead of having shares in a fund that directly owns the asset, such as gold, you essentially have a contract with a 3rd party that guarantees your exposure to the asset.
Generally, this should be quite a “big no-no” because it would expose you to unnecessary counterparty or issuer risk.
In the case of physical gold ETCs (and other physical ETCs), the good news is that this risk is substantially eliminated since physical gold bars are stored with a custodian as security and the ETC is 100% backed by this physical bullion and has exclusive rights of its ownership.
However, all else being equal I would still prefer having shares in an ETF that owns the assets directly versus going through the contractual debt, though admittedly securely ring-fenced, route.
Maybe it’s just me.
But there are some other shortfalls regarding these European-listed Gold ETCs.
The gold is most often not stored in the most favorable locations or jurisdictions that I highlighted previously (e.g. Switzerland, Singapore).
Most of the gold ETF providers store the gold in London or Germany. WisdomTree Physical Swiss Gold, as the name implies, is an exception, and stores its gold in Zurich.
At first glance it looks like a great candidate for a Gold ETF.
However, upon closer inspection, I notice that are too many intermediaries for my liking. Here is an extract of the Key Investor Information Document:
Moreover the fund is domiciled in Jersey, which adds an extra jurisdiction to the mix.
I really like the fact that the gold is stored in Switzerland though.
Which got me thinking…
“Where else can I find funds that invest in Swiss gold?”
And so I decided to change my location on JustETF.com:
Swiss Gold ETFs
Let’s dive right into the list of Swiss gold ETFs with more than 1 billion in AUM (the minimum size I typically look for when investing in ETFs):
Notice how the Swiss gold funds are ETFs and not ETCs? So far, so good!
As you can see, the main options are ZKB and UBS (ignore the iShares Gold Producers UCITS ETF that showed up in the search results).
Zürcher Kantonalbank, or ZKB for short, is the largest cantonal bank and 4th largest bank in Switzerland. Interestingly, it is wholly owned by the Canton of Zurich.
And UBS, well, is UBS, a world renowned bank and the biggest one in the country.
They both store their gold in Switzerland and both funds are domiciled and managed in Switzerland.
Which is great news, since Switzerland is one of the safest jurisdictions for holding gold (remember?).
The main downside with the Swiss funds is that AUMs are relatively low compared to the biggest European Gold ETCs. But the fund sizes are definitely large enough.
So not a huge negative but something to keep in mind.
Now let’s go a bit deeper into both the ZKB and UBS gold ETFs.
ZKB Gold ETFs
Let’s look at the fund description of the ZKB Gold ETFs:
Doesn’t it all sound like music to your ears? Much better than the fine print you can read on EU listed gold ETCs that’s for sure.
The ZKB gold ETFs can be purchased in Swiss Francs, US Dollar, Euros. All of which have over 1 billion in AUM. There are also GBP versions but these are too small to be investable.
They also come with hedged variants, these are appended by an “H”, e.g. ZKB Gold ETF H. I will discuss hedging and currency considerations later.
Below is a summary of all the ZKB gold ETFs:
Let’s now look at the UBS Gold ETFs.
UBS Gold ETFs
Here is the fund description of the UBS Gold ETFs:
Not as enticing as the ZKB fund description but that’s just a detail.
The fund is domiciled in Switzerland, managed in Switzerland and the gold is stored in Switzerland. So it ticks all the boxes in that regard.
The most interesting thing about UBS and gold is that UBS is a major international gold bullion dealer, and even has its own branded bars!
There are several options of UBS gold ETFs that you could choose from:
At this stage, you may be wondering about how to approach Gold ETF currencies and hedging.
Luckily, I’ve got you covered!
Gold ETF currencies and hedging
The topic of currencies and hedging, especially when it comes to gold, can be confusing so let’s briefly go over it because it’s important.
When it comes to currencies, the fund currency, and i’m talking about the unhedged versions here, doesn’t really matter all that much.
You will always be exposed to gold in USD since gold is priced in USD.
It’s simply easier to purchase in the currency you have on hand or that you want to maintain this allocation to so that you don’t have exchange rate fees.
I would recommend either buying gold funds in your base currency (if it’s available) or in USD, which you will definitely have on hand if you’re investing on the US stock market.
If you’re an investor who invests solely in euro denominated ETFs, then just stick to euros.
If you’re an investor who has both euros and USDs in decent amounts, then I would suggest buying it in USDs.
In USD, because it’s easier to see the actual nominal price changes of your gold ETF and you can always recalculate in euros if needed (and your broker will consolidate your portfolio value in euros anyways).
Now let’s move on to hedging.
Should you hedge your gold ETF? The short answer is, no.
And now, the (hopefully not too) long answer.
It is tempting to say I am based in Europe so I will buy the EUR hedged version and so, like this, I avoid currency risk while gaining exposure to gold, which is the asset I ultimately want.
I almost decided to go down this route myself.
The thing is however, if you do that, then you’re not really investing in gold anymore.
Because gold is priced in USD and its value depends, to a high degree, on the value of the USD. Gold is a “currency” itself that is somewhat “pegged” to the USD. You can’t dissociate the two.
So if you hedge it, what you’re essentially doing is transforming gold into some sort of weird derivative.
If you want more details, here’s a good resource that explains hedging gold investments against currency risks pretty well.
OK, now that you have a good overview of the different options available to you as a European investor and an idea of how to look at gold ETF currencies and hedging, it’s time to narrow down and make an informed choice on the best gold ETF.
The Best Gold ETF for Europeans
So what is the “Best Gold ETF for Europeans”? The answer is, unfortunately, it depends.
Especially since I’m not a financial advisor and don’t know about your personal situation, which could definitely impact your choice.
However, I’m definitely a believer that you should make your own financial decisions so in this section I will guide you into making the best choice, for you.
I will also provide my preferred option, for me.
The cheapest gold ETF
Do you care at all about the fact that in the European Union, listed gold funds are in fact Exchange Traded Commodities (ETCs) and not ETFs?
It’s a perfectly valid question.
After all, most of the biggest ETCs are actually backed 100% by gold and track its price perfectly well.
It’s just that with ETCs you don’t actually own the shares but have a contract with the provider promising you that they owe you part of the gold and guaranteeing through other independent parties that the gold will always be there.
Especially since ETCs are the most popular and the cheapest option to gain exposure compared to the Swiss-listed ETFs.
But there’s also another small sacrifice that you will need to make, the location where your gold is stored.
If you’re looking for the cheapest option and don’t mind the small sacrifices, then your best bet would be the Invesco Physical Gold ETC or the XETRA-Gold ETC.
Especially if you’re only planning to invest a small amount in the grand scheme of things.
Notice how Xetra-Gold is free? That’s amazing but I haven’t managed to figure out if there is a catch.
There are as many as 6-7 intermediaries involved so it’s probably a way for them to leverage liquidity from investors. I would say it’s probably a slightly less safe option than Invesco.
But I must admit, I’m not sure. So personally, I’m staying away for the moment.
You may question why I haven’t included the WisdomTree Physical Swiss Gold ETC, which I presented earlier in the post.
This is mainly because its expense ratio of 0.19% is quite high and not much lower than the Swiss-listed UBS Gold ETF, which has an expense ratio of 0.23%. Also, the fund is listed in Jersey (why add exposure to an extra jurisdiction?) and has quite a few intermediaries.
It also much smaller than Invesco Physical Gold and Xetra-Gold, though it’s still quite large.
The safest ETF
The safest option is definitely a gold ETF listed in Switzerland where the gold, fund domicile and counterparties are all in the country, one of the safest jurisdictions in which to own gold.
The absolute safest option are the ZKB gold ETFs.
More so than UBS, because I feel that ZKB, being a cantonal bank that is wholly-owned by the Canton of Zurich, is probably more prudent (a lot less investment banking and trading activities in risky areas) and less exposed to the global financial system.
But I wanted to make absolutely sure, so I dug deeper.
And here is the credit rating of ZKB according to the really useful thebanks.eu website:
Triple A! For your information, UBS is currently AA-. ZKB is safer indeed.
The main drawback with the ZKB gold ETFs are their relatively high expense ratios at 0.40%. But guess what? US-listed GLD, the biggest gold fund in the world has an expense ratio of 0.40%.
And with ZKB, your gold is in Switzerland instead of London and falls outside the jurisdiction of the U.S. (which has confiscated gold in the past). So it’s not too bad, is it?
If you’re enticed by the safest gold ETF provider for Europeans, simply choose one of the unhedged versions in USD or in your local currency. For investors from the UK, avoid the GBP fund because its AUM is currently tiny.
And last, but definitely not least, the middle ground option!
The middle ground option
If you like the thought of a Swiss gold ETF at a reasonable price, go with the UBS Gold ETF.
You benefit from the jurisdiction of Switzerland just like ZKB with a reasonable expense ratio of 0.23%.
The UBS gold ETFs can be purchased in Swiss Francs or USD. While the Swiss Francs version does not appear on JustETF.com, a look at the Factsheet shows that you can indeed purchase it in CHF.
Unless you’re based in Switzerland, you should probably get the USD version.
This is what I will do, because the UBS Gold ETF is my preferred choice and the one I will invest in for my gold allocation.
So? What about you? Which gold ETF will you choose?