The average gold ETF has returned 221.83 per cent since October 2006, beating the best-performing gold fund – Smith & Williamson Global Gold & Resources – by nearly 100 per cent.
Performance of funds vs average ETF over 5-yrs
Source: FE Analytics
Although operational gearing meant that gold funds did far better than the average gold ETF in 2009 and 2010, a higher level of volatility has cost them in the long-run.
According to FE Analytics data, the average gold ETF has an annualised volatility of 21.3 per cent. By contrast, all four gold funds have an annualised volatility greater than 35 per cent.
Volatility of funds vs average ETF over 5-yrs
| Name |
5-yr volatility (%) |
| Average gold ETF |
21.3 |
| BlackRock Gold & General |
36.45 |
| CF Ruffer Baker Steel Gold |
35.88 |
| Investec Global Gold |
37.45 |
| Smith & Williamson Global Gold & Resources |
38.19 |
Source: FE Analytics
Gold funds, which invest in a basket of mining equities and other gold-related shares, have a far higher correlation with the performance of the equity market compared with the likes of ETFS Physical Gold and ETFS Gold Bullion, which simply track the gold price.
It is for this reason that gold funds suffered heavy losses in the immediate aftermath of Lehman Brothers. By contrast, gold ETFs soared, as the precious metal tends to prosper in times of economic crisis.
Gold funds have also struggled in the past 12 months. Although the gold price has soared, mining stocks have been hit by rising oil prices and wage increases.
Crucially, gold ETFs have been effective in tracking the gold price. All three gold ETFs have returned within 7 per cent of the S&P GSCI Gold Spot over a five-year period.
Performance of gold ETFs vs gold price over 5-yrs
Source: FE Analytics
In the last three years, only one of the eight gold ETFs with a long enough track record – Kotak Gold – has underperformed the S&P GSCI Gold Spot by more than 8 per cent. The index has returned 127.89 per cent in this time.
In spite of the superiority of gold ETFs in the long-term, FE Trustnet users prefer gold funds. According to the latest FE Trustnet poll, only 12 per cent of respondents said ETFs were their vehicle of choice when looking to gain exposure to commodities.
By contrast, 49 per cent said they favoured funds, while 26 per cent went for investment trusts. Investing in direct equities accounted for 13 per cent of the vote.
Nicholas Brooks, head of research at ETF Securities, says investors should consider holding both gold ETFs and funds in their portfolio.
"Physical gold and gold equities are very different investments. While miners benefit when the price goes up, they also have to contend with equity market Beta, and the impact of costs," he explained.
"Gold shares tend to perform better than the stock market in down periods, and beat the gold price in up periods due to operational gearing. In this sense, it could be said that physical gold and gold equities complement one another."