The Permanent Portfolio, Investing, Finance and Random Thoughts.
Posts tagged ETFs
iShares Treasury Long Term Bond Index ETF Lending Securities and Risk
2 months ago
Recently it’s become clear that iShares is doing a lot of securities lending behind the scenes in their TLT Treasury ETF. This is a Treasury ETF they offer to hold bonds in excess of 20+ years. While not a perfect solution for the Permanent Portfolio, it is recommended by myself if you want to build a portfolio with just ETFs and cannot buy bonds directly.
However, tax documents from the fund for 2011 showed low levels of income from government obligations. This means that interest is being received from non-government bond sources. Which further means that if they are getting paid interest from non-government bond sources, then who are these sources?
This was discussed on the forum: TLT – Why Is Income from Govt Obligations so LOW? Thanks to Moda0306 and other readers for digging into the problem.
Sadly, this activity is common in the industry. It may boost returns slightly, but it makes a mess for taxable account holders because the income could be taxable at both the state level along with the federal level. It also introduces counter-party risk due to the lending activity. I don’t believe this risk is likely very big, but it is there.
Any fund can succumb to this kind of behavior (called manager risk). This is why I always advocate holding the bonds directly if you can. It just eliminates another problem. I’ll comment more on it in the future. This is just the compromise that happens for the convenience of ETFs or bond funds.
Again, just as Harry Browne recommended, hold Treasury bonds directly if possible. It is easy to do at most brokerages. Best of all, you not only eliminate annual expenses of a bond fund but also the managers that may be doing things behind the scenes that are not in your interest.
Cheap ETF Trades at TDAmeritrade for the Permanent Portfolio
3 months ago
TDAmeritrade has 100 commission free ETF trades going on now.
https://www.tdameritrade.com/trade/etftrading.html
They allow commission free trades on:
https://www.tdameritrade.com/trade/etflist.html
Stocks – iShares Russell 3000 (Ticker: IWV) and Vanguard Total Stock Market (Ticker: VTI) stock index funds
Bonds – iShares long-term Treasury (Ticker: TLT)
Cash – iShares 1-3 year short-term Treasury (Ticker: SHY)
Nothing on gold, but if you store it physically this doesn’t matter.
This is a great opportunity for a Permanent Portfolio investor looking to run a mostly ETF portfolio very cheaply.
Using the ETFs with physical gold storage at your local bank would give you a very solid portfolio for low cost. If you wanted to use an ETF as part of a hybrid gold allocation (some physical and some in an ETF like Tickers: GLD, IAU or SGOL) then the fees are still low because TD’s ETF commissions are very cheap.
Overseas Gold ETFs for Geographic Diversification
3 months ago
by Craig Rowland
in Investing
There are several ETFs now that claim to hold gold overseas in places like Switzerland (or even closer in Canada). They are marketed as a way to get geographic diversification for gold holdings. There is even a spin that you can show up and pickup your gold. These are all marketing claims. Let’s talk about them.
Street Name
When you buy a stock/ETF it is held in the street name (another definition) of the broker, not your name. The idea that you’re going to show up in Zürich or Alberta and pick up your gold from an ETF before hitting the slopes is pure marketing. The chances that the fund operator is going to know it’s you that owns the shares is almost zero. The shares are almost all owned by brokerages in their name. The brokerage then keeps track in their own records who holds what. You’d have to work with your broker to get actual stock certificates issued in your name which is going to be a pain. Then there is the issue about showing up and proving your identity, etc.
The idea that you’re going to show up in Zürich or Alberta and pick up your gold from an ETF before hitting the slopes is pure marketing.
Where the Money is Really Kept
Also many people are not aware that funds that hold money in US dollars likely have those assets in US banks/brokerages even if based in another country. So the liquid cash assets are not outside of the US. The gold may be, but that’s it! There are plenty of ways the US govt. could put pressure on these ETFs to comply with repatriation orders, etc. You are not going to be protected from this kind of threat if that is what you think (not that it is likely anyway).
What Gold ETF is Best?
The ETF from the Canton Bank of Zürich (Zürcher Kantonalbak) under the ticker ZGLD is probably the “best” of the bunch. This is an ETF from a very well established Swiss bank with solid backing by the Canton of Zürich. It is operated under strict Swiss banking laws.
Now for the bad news…
This ETF is not available for purchase by Americans. You could jump through some hoops to get it on a foreign exchange, but this is a bad idea because of potential tax and other issues not being registered here. So even if you can buy it, you should be aware that it is strongly discouraged.
Now, if you are a non-US person in a foreign country then by all means buy ZGLD. It is probably the best of the Gold ETFs out there.
ETFs Have Similar Risks
Many of these ETFs have similar risks. They almost always use the same vaults, etc. to hold their gold in places like Switzerland, just the name is different. The Canadian ETFs (GTU and CEF) are exceptions as they hold it in Canada. But again you get that street name issue again so good luck proving you own it if your brokerage has a problem.
Gold ETFs are convenient and good for a portion of your gold holdings if you want easier rebalancing. But if you want to hold gold overseas you’re going to need to do something more robust to get the higher safety. This is just the reality of the situation. These overseas storage ETFs may be marginally better than the big guys of StateStreet GLD or iShares IAU, but ETFs are all going to have similar risks no matter what the marketing department has to say on the matter.
Where Can I Find Out More?
Glad you asked! Did I mention that overseas gold storage options for all persons (including Americans) will be covered in the upcoming book? Accounts from a minimum of a single gold coin in allocated storage up to millions in value will have options. What a coincidence! Sign up for the book here and we’ll discuss the options available that will be a more robust way to handle overseas gold allocations than using an ETF:
Permanent Portfolio Book Announcement List
