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Understanding Gold ETFs protection policy
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PingPongSet
Posts: 33 Forumite

I want to double check whether or not the three gold etfs below are protected by UK gov, like protection for money in the bank e.g. £85,000.
Is it correct that none of them provide protection. That is, I will lose all investment if the company bankrupts?
hl.co.uk/shares/shares-search-results/e/etfs-metal-securities-ltd-eft-phy-gold
hl.co.uk/shares/shares-search-results/i/invesco-markets-physical-gold-etc-gbp
hl.co.uk/shares/shares-search-results/i/ishares-physical-metals-physical-gold-etc
Each text below is from the link to "Key Information Document (KID)" on each production page above
Is it correct that none of them provide protection. That is, I will lose all investment if the company bankrupts?
hl.co.uk/shares/shares-search-results/e/etfs-metal-securities-ltd-eft-phy-gold
hl.co.uk/shares/shares-search-results/i/invesco-markets-physical-gold-etc-gbp
hl.co.uk/shares/shares-search-results/i/ishares-physical-metals-physical-gold-etc
Each text below is from the link to "Key Information Document (KID)" on each production page above
What happens if ETFS Metal Securities Limited is unable to pay out?
The Issuer is a special purpose company. In case of a default by the Issuer (or where relevant, the swap counterparty), any claims made against the Issuer will be satisfied in order of the priority of payments set out in the conditions of the product. If the net proceeds from the enforcement of the secured property relevant to the product are not sufficient to meet all obligations and make all payments then due in respect of the securities, the obligations of the Issuer in respect of such securities will be limited to the net proceeds of realisation of the relevant secured property. In thes circumstances you may suffer a loss if you cannot realise the full value of your investment.
The Issuer is a special purpose company. In case of a default by the Issuer (or where relevant, the swap counterparty), any claims made against the Issuer will be satisfied in order of the priority of payments set out in the conditions of the product. If the net proceeds from the enforcement of the secured property relevant to the product are not sufficient to meet all obligations and make all payments then due in respect of the securities, the obligations of the Issuer in respect of such securities will be limited to the net proceeds of realisation of the relevant secured property. In thes circumstances you may suffer a loss if you cannot realise the full value of your investment.
What happens if Invesco Physical Markets unable to pay out?
You may face a financial loss should the manufacturer or depositary, JPMorgan Chase Bank, N.A., default on their obligations. There is no compensation or guarantee scheme in place which may offset, all or any of, this loss.
You may face a financial loss should the manufacturer or depositary, JPMorgan Chase Bank, N.A., default on their obligations. There is no compensation or guarantee scheme in place which may offset, all or any of, this loss.
What happens if iShares Physical Metals plc is unable to pay out?
The underlying precious metal of the ETC is held in safekeeping by the Company's Custodian, JPMorgan Chase Bank N.A. London Branch, and/or sub-custodians (appointed by the Custodian). In the event of the insolvency of the Arranger or Trustee, the ETC’s underlying metal in the safekeeping of the Custodian and/or subcustodians will not be affected. In the event of the insolvency of the Custodian or any sub-custodian, the allocated metal held by the Custodian or any subcustodian in an “Allocated Account” (which is a segregated account in which metal is held in allocated form) for the benefit of the Company for the ETC should be protected as such metal should be identified separately from the assets of the Custodian, any sub-custodian and their other clients. Compensation will not be available under the UK Financial Services Compensation Scheme or any other scheme in the event of insolvency of the Company, Custodian, sub-custodians, Arranger and/or Trustee.
The underlying precious metal of the ETC is held in safekeeping by the Company's Custodian, JPMorgan Chase Bank N.A. London Branch, and/or sub-custodians (appointed by the Custodian). In the event of the insolvency of the Arranger or Trustee, the ETC’s underlying metal in the safekeeping of the Custodian and/or subcustodians will not be affected. In the event of the insolvency of the Custodian or any sub-custodian, the allocated metal held by the Custodian or any subcustodian in an “Allocated Account” (which is a segregated account in which metal is held in allocated form) for the benefit of the Company for the ETC should be protected as such metal should be identified separately from the assets of the Custodian, any sub-custodian and their other clients. Compensation will not be available under the UK Financial Services Compensation Scheme or any other scheme in the event of insolvency of the Company, Custodian, sub-custodians, Arranger and/or Trustee.
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Comments
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PingPongSet wrote: »I want to double check whether or not the three gold etfs below are protected by UK gov, like protection for money in the bank e.g. £85,000.
Is it correct that none of them provide protection. That is, I will lose all investment if the company bankrupts?
hl.co.uk/shares/shares-search-results/e/etfs-metal-securities-ltd-eft-phy-gold
hl.co.uk/shares/shares-search-results/i/invesco-markets-physical-gold-etc-gbp
hl.co.uk/shares/shares-search-results/i/ishares-physical-metals-physical-gold-etc
FSCS provides protection against failed deposits in a bank account, and also covers failed investment firms and financial advice, but if you choose to buy one of these ETFs directly (as opposed to buying financial advice from a regulated advisor who told you to buy one of them, and it turned out to be very inappropriate for your needs), you won't get compensation for your poor choice of investment.
You may feel it is fine to not have a compensation scheme because the ETF is unlikely to become bankrupt, because all it is doing is holding assets, and even if the company running the ETF goes bust, the physical assets still belong to the ETF (rather than to the promoter / manager). Still, the overall risk is not zero.
Unlike (e.g.) buying shares in a business which makes profits and pays dividends to its owners or buying bonds issued by a company who pays interest to its bondholders - an ETF owning gold is not generating any profits to pay to its investors to reward them for the risk. Gold doesn't grow in size or generate income, it just sits there and costs money to store and insure. The value of having it is speculative, i.e. hoping that someone might pay you as much (or more) to buy it off you later, than you pay to buy it today. But they might not.
So if you're going to hold gold, there is not always going to be a 'reward' to compensate you for the non-zero risk of using an ETF to do so. Though ETFs are more convenient than holding physical gold yourself, and may be the only way of doing it if you are looking to hold it in an ISA or cheap SIPP.0 -
bowlhead99 wrote: »because the ETF is unlikely to become bankrupt, because all it is doing is holding assets, and even if the company running the ETF goes bust, the physical assets still belong to the ETF (rather than to the promoter / manager). Still, the overall risk is not zero.
Thank you for your great comment.
Can you please elaborate on these points below, if possible:
1 "ETF is unlikely to become bankrupt": why is unlikely to bankrupt?
2 "the physical assets still belong to the ETF": does it mean investor will get refund?
I posted a similar question below covering wider topic
forums.moneysavingexpert.com/showthread.php?t=6036222
Is it correct that both ETF and all shares, e.g. FTSE 100/250 are NOT protected if company goes bankrupt?
If yes, why are investors still investing money on them? That is risky.
Thanks again for the great advice.:)0 -
PingPongSet wrote: »Thank you for your great comment.
Can you please elaborate on these points below, if possible:
1 "ETF is unlikely to become bankrupt": why is unlikely to bankrupt?
It is not like when you look at HMV or Blockbuster Video or Woolworths and they had high running costs and nobody wanted to pay high prices to buy their products any more because they could find alternatives elsewhere, so the running costs of the business exceeded its sales revenue and they ran out of money. The ETF is not playing a finely-balanced game of earning income and hoping it keeps being more than the costs. Gold does not produce any income, it merely sits there.
The risk with an ETF holding commodities is really just the different counterparties in the chain of ownership who may make commercial mistakes and have their businesses fail.2 "the physical assets still belong to the ETF": does it mean investor will get refund?
You will generally not get 'refund' because the shares are not redeemable shares that you can just cash in by telling the manager you want your money back. Either you can sell your shares to someone else on the stock exchange, or if the fund decides to discontinue its operations and delist from the stock exchange it could cash in its assets and distribute them to all the shareholders.
Obviously if there is some big problem with the ETF's manager, you may have to wait to do this, and if they are in the process of winding up they may de-list from your favourite stock exchange if they are listed on several. And it is relatively more costly to run a failing small ETF than it is to run a large one with lots of economies of scale, so that can cause you to lose value.Is it correct that both ETF and all shares, e.g. FTSE 100/250 are NOT protected if company goes bankrupt?
If yes, why are investors still investing money on them? That is risky.
If you deposit your money in a bank account, there is a compensation scheme which will cover you in case the bank fails, so it is zero risk (other than the risk of inflation eroding your money in real terms). The compensation scheme exists so that people will have faith in the banking system, which is a good thing for the economy.
However, for investments, it is not zero risk. In order to make more profit than the 'risk free rate', and hopefully keep up with inflation, or grow their wealth, investors will take the risk of losses or investment failure, in the pursuit of greater rewards.
A typical person might work from age 20 to 60 and then be retired without a job from 60 to 100. So they need to amass enough wealth in forty years to keep them going in the next forty. But most people spend most of the money they get from their job, and do not have it available to save or invest. If you want to use some small fraction of your salary for forty years to provide some large fraction of your salary for the following forty years, you are going to need some investment returns much greater than the 'risk free rate', because if you don't even keep up with inflation your wealth will shrink rather than grow, and certainly not grow 'enough' to meet your retirement objectives without putting a huge amount in.
Some people never invest, and simply try to 'save' and then 'live off their savings'. It will likely be harder for them to do that, if they don't have some 'investments' doing the heavy lifting of growing their wealth, because it means they have to work a lot more hours during the productive part of their life - or start a successful business, (which is risky and does not have a £85000 compensation scheme), or buy a lot of property (which is risky and does not have a £85000 compensation scheme) etc.
So most people generate wealth for themselves through investments which have risk - even if it is their company pension scheme taking the risk rather than themselves. The idea being that investments can go down as well as up, but overall the direction is up, if you are broadly diversified in what you invest.0 -
PingPongSet wrote: »If yes, why are investors still investing money on them? That is risky.
Don't take this personally but you have a very naive view of risk.
It's meaningless to discuss "risk" without specifying what type of risk..
Sure there's a risk the share could drop in value or even go to zero. If you hold multiple shares within a fund, that risk is lessened. If that fund wasn't just,say, shares in the U.K. you could lessen the risk by holding shares in multiple countries, let's say a global fund. Of course they could still fall over a particular timespan, but you are trading the risk they will for the opportunity they will rise, which historically over longer time periods, they have done so because the world economy is growing.
In the meantime, if you held your money instead as, just cash, there's a risk, almost a certainty that inflation will reduce its real value. Ok so you might hold it as gold instead. Well gold has periods of Decline since it has little intrinsic value and also, unlike shares it doesn't pay dividends, whilst your shares will often pay dividends even if they fall in value. So long term gold will almost certainly be outpaced by investing in the economy.
It's as if you asked "why do people leave their houses because there's always risk they will be run over," without looking at the benefits of leaving your house such as having a job, earning money , some of which will enable you to stay in that house plus of course there's a risk to staying in the house all the time - you'll get less exercise so your health will likely decline, you cant afford to repair the house so it goes into decline, and so on.
Point being there's multiple different risks to every action and you focus on one only
As another example of poor decision making regards risk, after 911 in the US air travel declined for a couple of years, many people stopped flying because of the perceived risk of flying. Road fatalities jumped much larger than flying fatalities compared over the preceding years, because there's a much bigger risk to driving (which is what many of those people were doing instead of flying)
So, You focus on one risk only, that a single single company go bust and don't looked at the wider picture such as spreading the risk across multiple companies nor the risk of not investing which includes almost certainly losing value to inflation, and no income. The gold stocks you are looking at will never pay out money each year. Most funds will do so, even if they end up reinvesting the money.
So, look at the whole picture not just one aspect and never ever talk about "risk" as if it's single thing. In your original question you focus on the tiny risk a company running gold investments will go bust and scarper with your money, and ignore the far larger long term risk, that gold will relatively lose value compared to what else you could do with that money.0 -
bowlhead99 wrote: »Unlike (e.g.) buying shares in a business which makes profits and pays dividends to its owners or buying bonds issued by a company who pays interest to its bondholders - an ETF owning gold is not generating any profits to pay to its investors to reward them for the risk. Gold doesn't grow in size or generate income, it just sits there and costs money to store and insure. The value of having it is speculative, i.e. hoping that someone might pay you as much (or more) to buy it off you later, than you pay to buy it today. But they might not.
Considering the current economic climate, e.g. Brexit, trade war, Europe/US QE, recessions, what are the better investment option, if gold is only a hedge option?
Is there resource for beginner to understand this more?0 -
AnotherJoe wrote: »You focus on one risk only, that a single single company go bust and don't looked at the wider picture such as spreading the risk across multiple companies nor the risk of not investing which includes almost certainly losing value to inflation, and no income. The gold stocks you are looking at will never pay out money each year. Most funds will do so, even if they end up reinvesting the money.
Obviously, I am a beginner in investment. I would like to learn more in investment.
Again, considering the current economic climate, e.g. Brexit, trade war, Europe/US QE, recessions, what are the better investment option, if gold is only a hedge option?
Again, I would like to become a smarter investor if possible.:)0 -
There are several recent threads in here regards learning about investing.0
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