Q: I read an article recently that talks about the validity of ETF's. Can you make your comments about this!
Terms are that, each share of an ETF is an IOU.
As an example what happens behind the scenes when an ETF buys gold?
The actual metal purchased is stored by a custodian such as a major bank like JP Morgan or HSBC – yes, the same banks that have been investigated for silver and gold manipulation many times in the past.
But what you may not know is that the value of each share you own, or more specifically, the share-to-metal ratio, actually decreases the longer you hold it.
For example, the fund that manages the ETF must sell gold to pay for expenses, reducing the amount of gold tied to each share.
That's one of the reasons ETFs should NEVER be considered a long-term investment.
In other words, ETFs are not the way to go if you're looking to gold as a store of value or as an insurance policy against fiat currencies.
The same goes for Bitcoin ETFs.
Over time, the ETF fund will sell some of its Bitcoin to cover operating costs and management fees. As a result, an investor's unit will gradually hold a slightly smaller amount of Bitcoin than their initial purchase.
I would appreciate receiving your comments about this information!
Thanks.
Terms are that, each share of an ETF is an IOU.
As an example what happens behind the scenes when an ETF buys gold?
The actual metal purchased is stored by a custodian such as a major bank like JP Morgan or HSBC – yes, the same banks that have been investigated for silver and gold manipulation many times in the past.
But what you may not know is that the value of each share you own, or more specifically, the share-to-metal ratio, actually decreases the longer you hold it.
For example, the fund that manages the ETF must sell gold to pay for expenses, reducing the amount of gold tied to each share.
That's one of the reasons ETFs should NEVER be considered a long-term investment.
In other words, ETFs are not the way to go if you're looking to gold as a store of value or as an insurance policy against fiat currencies.
The same goes for Bitcoin ETFs.
Over time, the ETF fund will sell some of its Bitcoin to cover operating costs and management fees. As a result, an investor's unit will gradually hold a slightly smaller amount of Bitcoin than their initial purchase.
I would appreciate receiving your comments about this information!
Thanks.
5i Research Answer:
It is certainly true that ETFs need to sell assets to cover expenses. But we would not necessarily reference them as IOUs. ETFs hold segregated assets, and unit values reflect the value of those asset. Yes, some gold/bitcoin ETFs will lend out assets to earn more money. Investors have questioned ETFs such as GLD for years as to whether it actually holds the gold it says it does. This is why we would prefer 'physical' ETFs such as PHYS, which holds actual bullion and conducts regular inventory checks. PHYS, and some others, can also exchange their ETFs for actual gold bullion, in minimum quantities. This helps reduce any discount between bullion prices and the ETF's net asset value.