Is Wealthsimple’s New Physical Gold Trading Worth It? – Money sense

However, that guide left out one important newcomer. Wealthsimple has since launched direct physical gold trading, and it came with a splash. The rollout included a promotional giveaway featuring a one-kilogram gold bar, 10 one-ounce coins and 50 one-tenth ounce coins for eligible customers who deposited money and completed a survey. The promotion ended on December 5.

Wealthsimple has a history of shaking up the Canadian financial services landscape. It was ahead of the big banks in things like commission-free options trading, direct indexing and now access to physical gold through a brokerage account. On paper, that combination of simplicity and novelty is attractive.

The question is whether it will hold up beyond the headline hype. Here’s my analysis of how Wealthsimple’s physical gold trading works, and how it compares to gold ETPs.

Wealth simple physical gold trading explained

Wealthsimple’s physical gold offering is not a stock or fund. When you buy it, you are purchasing a fractional Canadian dollar-denominated digital interest in physical gold reserves. The gold itself is stored at the Royal Canadian Mint and Brinks, and is held at a “program level on a segregated basis.” In simple terms, your gold is held in escrow with the gold of other Wealthsimple customers and kept separate from Wealthsimple assets.

You can access this offering through all Wealthsimple self-directed accounts. That includes both registered and unregistered, taxable accounts.

Trades are executed at CAD spot prices and there is a 1% transaction fee for both buying and selling. That means buying and immediately selling would result in a 2% return fee. However, there are no ongoing storage fees and like Wealthsimple’s crypto platform, gold trading is available 24 hours a day, seven days a week.

With physical deliverance, the limitations and costs become apparent. Exchanging bullion is only possible through non-registered accounts, and it isn’t cheap. Redeeming a one-ounce coin costs 2.25%, while exchanging a one-tenth ounce coin costs 11%. These costs cover minting, insurance and delivery, with fulfillment handled through Silver Gold Bull, one of the largest online bullion dealers. If physical delivery is the goal, the economics clearly improve when exchanging larger amounts instead of small denominations.

Wealth simple physical gold trading vs gold ETPs

The major gold ETPs are generally cheaper to trade and own from the outset over short and medium investment periods. To make the comparison concrete, it helps to look at the three Canadian-listed gold vehicles that actually offer physical redemption: the Purpose Gold Bullion Fund (KILO), the Sprott Physical Gold Trust (PHYS) and Canadian Gold Reserves (MNT).

To estimate total cost of ownership, I combine each product’s management expense ratio (MER) with the most recent 30-day median bid-ask spread. This provides a reasonable estimate of the cost of buying and holding the product, assuming no sales occur.

KILO is one of the most cost-efficient options. It has an MER of 0.28%. At the close of the market on December 12, it was trading at a bid of $61.88 and an ask of $62.00, implying a spread of $0.12, or approximately 0.19%. Compared to Wealthsimple’s 1% upfront fee, KILO stays cheaper for about the first three years you own it. Only then does Wealthsimple’s lack of an ongoing fee begin to offset the higher entry costs.

FYS is more expensive. The MER stands at 0.39% and on the same date it showed a bid of $45.18 and an ask of $45.40, a spread of $0.22, or about 0.49%. In this case, Wealthsimple’s 1% trading fee breaks even sooner, but still only after about 1.3 years of ownership.

MNT is in the middle in terms of fees with a MER of 0.35%, but trading costs are significantly higher due to poor liquidity. At the December 12 close, MNT had a bid of $64.29 and an ask of $65.00, a spread of $0.71, or approximately 1.10%. In this case, Wealthsimple is cheaper out of the gate, even before taking into account MNT’s ongoing MER.

All things considered, Wealthsimple’s physical gold offering isn’t the cheap choice for short investment periods. Low-MER products such as KILO and PHYS are generally cheaper for investors with a shorter or medium-term horizon. Wealthsimple only starts to make economic sense over longer investment periods, where the avoidance of an annual MER ultimately outweighs the higher initial fee. MNT is the main exception, where wide spreads almost immediately tilt the equation in Wealthsimple’s favor.

But what about redemption?

If your plan is to eventually own your Wealthsimple digital gold, the process is relatively intuitive. You make the request directly through the app and Wealthsimple specifies that delivery will be handled by an insured courier, which typically arrives within seven to 10 business days. By comparison, the physical redemption of exchange-traded products is much more restrictive.

For example, KILO only allows refunds in one-kilogram increments. For context, Silver Gold Bull currently prices a one-kilogram bar at approximately $193,631 CAD, putting reimbursement well out of reach for most retail investors.

PHYS is not much more flexible. The redemption rules require investors to hold enough shares equivalent to a standard London Good Delivery bar, which weighs approximately 400 troy ounces. That represents a very large capital investment.