GLD vs. GDX for Portfolio Diversification

Investments focused on the price of gold will provide additional diversification to a portfolio of stocks and bonds. Exchange-traded funds — ETFs — that own gold-related investments provide an easy way to add gold to your portfolio. Although both are ETFs, SPDR Gold Shares (GLD) and Market Vectors Gold Miners (GDX) are very different approaches to investing in gold.

SPDR Gold Shares — GLD

Launched in late 2004, the SPDR Gold Shares ETF, which trades under the GLD symbol, was the first ETF with shares backed by bullion gold. As of publication, it is also the largest. The share price of GLD will closely match changes in the price of spot gold. At the time of publication, each GLD share was backed by 0.09687 ounces of gold. The SPDR Gold Shares ETF has an annual expense ratio of 0.40 percent. Since GLD does not earn any income, the expenses will come from the gold holdings as reflected by the amount of gold backing each share.

Market Vectors Gold Miners ETF

The Market Vectors Gold Miners ETF, with the stock symbol GDX, is a fund that invests in shares of the largest gold mining companies from around the world. About 62 percent of the GDX holdings are companies from Canada, 17 percent are from the United States and 11 percent are from South Africa. Since gold miners should earn higher profits if gold increases in value, the share prices of these companies are strongly affected by changes in the price of gold. GDX, in existence since May 2006, has an annual expense ratio of 0.52 percent.

Relative Performance

For the five years through the end of October 2012, GLD significantly outperformed GDX. The SPDR Gold Trust provided investors with a 16.4 percent average annual return for the five-year period. The Market Vectors Gold Miners ETF produced a 1.5 percent average annual return for the same period. GDX more closely matched the stock market return — 0.3 percent per year for the SPDR S&P 500 ETF — than it did the return on gold.

Reasons for GDX

Past return results point to GLD as the better investment choice over GDX. The case for gold mining shares is that miners can continue to earn profits even if the price of gold is flat or even declining in value. Gold miner stocks can also pay dividends, which provide extra income into an investment portfolio. To diversify a portfolio, GLD provides investment in a different asset than stocks and bonds, while GDX sits in the stocks camp as well as reflecting the value of gold.