Physical gold in the form of bars or coins is the most expensive way to invest in the precious metal. In addition to the costs of safekeeping, high spreads can make its purchase or sale expensive – depending on the denomination and quantity traded. For example, the spread for the purchase of a 1-gram gold bar is often 50 percent or more, which can also apply to a sale in the same amount. While these costs significantly cut into the potential profits from an increase in value, the larger the quantity, the lower the spread. For the purchase of a one-kilo bar, the spread is usually at a much lower 2 percent. Spread is, however, also incurred on sale, further reducing the potential profit.    

Gold ETCs (exchange-traded commodities) are gaining increasing popularity among private investors. Products such as Xetra-Gold® reflect the gold price nearly 1:1, are entirely backed by physical gold, and offer private investors significant cost advantages over physical gold trading with gold bars or coins. Some issuers of gold ETCs, among them Xetra-Gold, certify the right to delivery of gold bars in the value of the investment.

The major benefits of Gold ETCs: their transparency, comparatively low wholesale prices, and narrow spreads. Investors should take a close look at the latter, as spreads can have a significant impact on overall performance.

Trading-based spread  

Generally speaking, market makers ensure market liquidity during trading hours by continuously offering buy and sell quotes within a specified maximum spread for the securities they manage. They play an especially relevant role for less liquid securities.  

For gold ETCs such as Xetra-Gold, with large trading and inventory volumes, appointed designated sponsors who are subject to regulations act as market makers on the Xetra® trading platform. They continuously place buy and sell orders to ensure liquidity and tradability. This means that they must adhere to strict rules regarding the number of buy and sell orders, continually observe the market and set spreads accordingly. 

An ETC may be managed by several designated sponsors, which greatly increases its tradability and ensures tight spreads. Six designated sponsors provide for the high liquidity of Xetra-Gold. And although a trading commission is also included, the spreads are usually significantly lower than those of ETCs from issuers whose commissions and ongoing expenses are covered exclusively by the spread. In general, the spread on Xetra-Gold is extremely low, frequently touching 0.01 percent. This is due, amongst others, to the high liquidity of the ETC: Xetra-Gold is the most frequently traded ETC on Xetra.

The issuer as market maker

Many investors are unaware of the fact that the price of a security is not determined solely by supply and demand on the stock exchange if the issuer of a gold ETC also functions as its market maker. As explained above, this is not the case with Xetra-Gold, which has regulated designated sponsors acting as market makers. 

The task of the market maker is to ensure tradability of a security at all times. In the case of the issuer acting as a market maker, the price is not directly derived from supply and demand. Rather, it is set by the issuer (in its role as market maker) and may deviate from the so-called fair value of an ETC – which it usually does to cover the issuer’s commissions and margins.   

Some issuers also include management and custody fees in their spread, which is not disclosed in the price of the ETC. The advantage for investors is that all costs of the gold ETC are covered and no periodic, for example annual, fees are incurred. The disadvantage is the lack of transparency in pricing, which makes it difficult to compare the costs of individual gold ETCs. This is an even greater issue when an ETC is later sold, incurring a further spread which reduces the sale price in an amount which cannot be anticipated when comparing costs prior to making a purchase decision. 

In illiquid markets and times of crisis, the spread can be unexpectedly wide with the market seeing fewer bids and asks. In more relaxed phases, the spread for gold ETCs whose issuers act as market makers and waive regular custody or management fees usually lies between 0.3 and 0.4 percent.

Low and predictable costs: Since gold ETCs are passively managed products, management fees are low, usually ranging between 0.1 and 0.3 percent. These fees are deducted on an ongoing basis, usually daily, to cover administrative costs. The disclosure of a management fee makes it easier for buy-and-hold investors – a strategy which can make sense for gold – to assess the long-term costs impacting the potential return on their gold ETC. Some issuers, among them the issuer of Xetra-Gold, Deutsche Börse Commodities, do not charge a management fee but only incur custody fees. For more details, see section 3.

Management fees are primarily influenced by the liquidity and assets under management of an ETC, as economies of scale can generate minimal management costs. Conversely, ETCs with low investment volumes or a high degree of specialization can incur disproportionately high management costs. 

Physically backed gold ETCs incur storage and insurance costs, which can be reflected in a custody fee rather than increased spreads and a management fee. The custody fee is charged to the investor.  
For Xetra-Gold, the monthly custody fee amounts to 0.029 percent, which is 0.36 percent per year, including VAT. The realistic representation of the actual storage costs contributes significantly to cost transparency. Custody fees are primarily determined by the volume and liquidity of the respective gold ETC. High-volume, heavily traded ETCs usually have more efficient storage structures.

Quick overview: the TER 

Cost comparisons of individual ETC providers frequently cite the TER (total expense ratio). The figure summarizes the individual cost and fee types and thereby offers investors a quick overview of gold ETCs, as at least two of the three cost types presented usually apply.

While the TER makes it somewhat easier to compare investment products, it has two disadvantages significantly reducing its informative value. Firstly, not all cost types are included, and secondly, any hidden costs in the spreads are left out of the equation entirely. To make a truly informed investment decision, it is therefore advisable to compare the respective spreads in addition to the TER – if possible.