Top Gold ETFs in Canada

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Gold is considered a symbol of purity, value and royalty. Gold and silver have been used historically as money. Gold is rare, beautiful and non-perishable. Gold does not rot, nor does it rust. These properties make gold an appropriate store of wealth and render it suitable for use as money. Indeed gold has been used as money for thousands of years. The currency code for gold is XAU.

Major currencies of the world used to be backed by gold. But after the second world war, an agreement was made for major currencies to be backed by the US dollar and for the US dollar to be, in turn, backed by gold. This arrangement, known as the Bretton Woods agreement, soon broke down. Currently, the world economy is operating with fiat currencies.

The US dollar (USD or US$) used to be defined so that $20.67 was redeemable for a troy ounce of gold. In 1934, the USD was devalued, so $35 was redeemable for a troy ounce of gold. Since March 1968, the official price of $35 US per troy ounce was only valid for international settlements, while private entities traded gold at a fluctuating price determined by supply and demand.

This official price for international settlements was the last linkage between paper money and gold. Since then, money is only defined as legal tender and is not linked to gold as a store of value.

Looking at changes in the gold price over time, it exhibits an inverse relationship with the central bank's credibility. When inflation is high or when the central bank is expanding its balance sheet, the gold price rises; for example, gold price reached its all-time high of around 2,730 Canadian dollars (CAD) at the same time when the size of Bank of Canada’s balance sheet reached its all-time high of about 575 billion CAD.

When the inflation rate and the central bank's balance sheet are stable, the gold price seems to languish. Thus it seems reasonable to have some exposure to gold in your portfolio as a hedge against potential fiat currency devaluation. As a store of value, the gold price also has a reverse relationship with the real rate of interest, which is the difference between the nominal rate of interest and the inflation rate.

The table at the top of this page contains almost all Canadian gold ETFs. In the following sections, we provide more information about the larger and more popular gold ETFs. For less experienced investors, we suggest you limit yourself to the tickers presented closer to the top of each of the following two sections on this page because they are larger ETFs which are not exposed to very risky small-cap gold miners.

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Buying gold miners is a leveraged bet on the price of gold. For example, if a mine has a 20% operating margin, a 10% change in the gold price can increase the operating margin by 50% or cut it by half. But this leverage does not come for free. In exchange for this leverage, you are taking on execution risk. Large mining operations are complex and dangerous.

So execution risk is never negligible in mining. But it is heightened when a company is completing the process of building a mine and bringing that mine into production. Thus when it comes to mining stock selection and diversification, professional management provided by ETF managers are specifically valuable.

XGD follows the S&P/TSX Global Gold Index. In this way, it provides exposure to the securities of gold producers. It trades on the TSX and pays quarterly dividends. It holds 44 companies and has a distribution yield of 3.38%. XGD is trading at 1.55 times its book value.

Most significant investments of XGD as of 10 November 2022.

GLCC is among Canadian high dividend yield ETFs. GLCC invests in large gold producers which are listed in the US or Canada. It gains some extra income by writing call options on its holdings. If you combine selling a call option with buying a put option, you can construct a synthetic short position.

CGXF is an actively managed fund which invests in (at least 15) large North American listed gold producers. It uses covered calls to increase its income and makes quarterly distributions.

If you would like to add gold diversification to your portfolio and prefer to avoid the execution risk inherent in miners’ stock, you can buy physical gold. If I buy a small quantity of gold, I likely have to pay a large markup to the retailer. Even if I am not deterred by the retail markup, I need to consider the security risk of keeping the gold.

Gold bullion ETFs are a solution to these problems. They pool resources from many investors and buy gold at wholesale prices. They also rent secure vaults and divide the cost among many investors.

Purpose Gold Bullion Fund buys physical gold and stores it in the Royal Canadian Mint. If you own units of the fund equivalent to 1 kg or more gold, you are eligible to request in-kind redemption. Meaning you can ask for your gold to be delivered to you. KILO is forex hedged, meaning that you will benefit from the appreciation of bullion price in US$. Changes in the exchange rate between different currencies would not affect you. This fund currently has around 165k ounces of gold. KILO is very similar to CGL, but it has a much lower MER. So we recommend KILO for gaining exposure to physical gold.

KILO.B is similar to KILO except that with KILO.B, you are buying gold in Canadian dollars. Unlike with KILO, where you are buying gold in US dollars. So with KILO.B, you benefit either when gold appreciates or when US$ appreciates. Weakness in the Canadian dollar has caused KILO.B to outperform KILO. We think the weakness in CAD is partly due to the risk-off sentiment in the market. It is likely that at the end of the current rate rise cycle, this trend will reverse itself.

KILO.U is the same as KILO, with the difference being that you buy it in US$ rather than in CAD.

CGL currently has about 8 tons of gold held in trust. Investing in CGL is equivalent to borrowing US$ and buying physical gold. Thus you would benefit from the rising gold price in US$, but changes in CAD/USD exchange rate would not affect your investment.

While CGL exposes investors to the price of gold in US$, CGL.C exposes them to the price of gold in CAD. So investing in CGL.C is equivalent to buying gold using your CAD. CGL.C has outperformed CGL in recent years because of the weakness in the Canadian dollar. We think the degree of weakness in CAD vs USD is not justified by economic fundamentals and is at least partly due to a general risk-off sentiment. So we expect CGL to outperform CGL.C in the medium term.

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When you invest in a gold ETF or gain exposure to gold in any way, you encourage more gold to be mined. And gold mining is not very environmentally friendly. The very properties which make gold valuable make it difficult to extract gold. Artisanal miners use mercury to dissolve gold and extract it from the ore. Even minor amounts of mercury leaking into water sources cause intellectual disability in exposed humans. Modern mining operations use cyanide compounds to extract gold, which is poisonous. Even if no cyanide escapes, the tailings of a gold mine often contain sulphate of heavy metals. These sulphates, which are brought to the surface and exposed to oxygen, would oxidize and produce sulphuric acid, which helps dissolve heavy metals in the tailing. So any leakage from these tailings to the underground or surface water can be a source of dangerous pollution.