The Best ETFs for Investing in Gold (Canadian Investor Edition)

Gold has undoubtedly captured the attention of Canadian investors, recently hitting an unprecedented high of $3,557.17 CAD per ounce as of September 30. It's become so popular that it's even being snapped up at Costco locations across the country.

However, before getting swept up in the excitement of all-time highs, it's crucial to consider a more calculated approach to investing in this timeless asset.

Rather than purchasing physical bars or coins, ETFs offer a more practical, cost-effective, and fluid method of investing in gold. These funds eliminate the challenges of physical storage and security, making it easier to manage and adjust your portfolio.

For Canadian investors looking to integrate gold into their investment strategy, gold ETFs can therefore provide a streamlined solution. Let's explore the reasons why these funds are a smarter choice for gold exposure and highlight some of the top gold ETFs available to Canadians.

Why buy a gold ETF?

Investing directly in physical gold presents several challenges for Canadian investors. When buying or selling gold, you face bid-ask spreads where dealers set their own buy and sell rates, potentially reducing the cost-effectiveness of your transactions.

Owning physical gold also involves significant storage and security considerations. Securing your gold investment typically requires a safe or a safety deposit box, and for larger holdings, insurance might be necessary to protect against loss or theft.

Additionally, the risk of counterfeiting adds another layer of complexity; for example, PAMP 1 oz bars are notoriously vulnerable to counterfeits if not purchased from reliable dealers.

Conversely, investing in gold through ETFs streamlines the entire process. You can trade shares of gold ETFs as easily as any other stock, making it a convenient and efficient addition to your investment portfolio.

This approach is also more tax-efficient for Canadians, as it avoids the distributions and potential tax implications associated with transactions involving physical gold.

The best gold ETFs for Canadians

The gold ETF space in Canada has seen a significant shift with newer, lower-cost ETFs disrupting older legacy options, which is a positive development for investors.

Traditionally, many investors defaulted to the iShares Gold Bullion ETF (CGL) and its non-currency hedged counterpart CGL.C, but I've always found these options less appealing primarily due to their high expense ratio of 0.55%.

My preferred choice for Canadian investors is the BMO Gold Bullion ETF (ZGLD). This fund is well-capitalized with $597.96M in assets under management and offers a much more affordable expense ratio of 0.25%, which is less than half that of CGL/CGL.C.

ZGLD invests in long-term holdings of unencumbered gold bullion in 400 troy ounce international bar sizes. This means the ETF holds large, standard gold bars that are stored in a local BMO vault, which is audited periodically to ensure security and compliance.

Additionally, ZGLD is eligible for inclusion in all registered accounts, including Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs), and First Home Savings Accounts (FHSAs).

Why not buy other gold exchange-traded products?

When searching for gold investment options on your brokerage app, you might encounter two exchange-traded products that aren't typical ETFs: the Canadian Gold Reserves (MNT) and the Sprott Physical Gold Trust (PHYS).

Starting with MNT, this product is actually an exchange-traded receipt issued by the Royal Canadian Mint. Unlike ETFs, which pool investor funds to purchase assets, each MNT receipt represents a claim to a specific quantity of gold held by the Mint.

While this backing by a national mint adds a layer of security, one downside is that MNT isn't very liquid and often trades with a large spread between the buy and sell prices. However, it's relatively inexpensive with a 0.35% sponsor fee and uniquely offers the option to redeem receipts for physical gold, provided you own a sufficient quantity.

Moving on to PHYS, this product is a closed-end trust, meaning it lacks the typical ETF feature of creation and redemption mechanisms that help align the trading price with the net asset value (NAV) of the underlying assets.

As a result, PHYS can trade at a significant premium or discount to its NAV, influenced by market supply and demand. Currently, it trades at a -1.52% discount to its NAV as of September 30. While this might seem like a buying opportunity, there's no guarantee the discount will narrow; historically, it has sometimes been even wider.