Q: A new exchange-traded fund (ETF) called Sprott Physical Gold Trust (NYSE: PHYS) recently came to the market. What are your thoughts on this new offering? I like that that shares can be redeemed for physical gold. Is it a good deal?–Anthony Williams

A: For starters, we should be clear about the fund’s structure. Although a few press reports describe Sprott Physical Gold Trust as an ETF, it’s actually a closed-end fund (CEF). Some might consider that splitting hairs, but the two structures are significantly different.

Although both funds trade on a stock exchange like a common stock, ETFs are able to create and redeem new shares on demand for institutional investors–or, in industry parlance, qualified participants.

That’s an important distinction because that process of share creation allows institutional investors to arbitrage fund shares against the basket of underlying stocks and, in the process, ensures that the fund’s share price stays fairly close to its net asset value (NAV).

On the other hand, CEFs are authorized by regulators to issue only a fixed number of shares, eliminating the possibility of arbitrage. Accordingly, CEFs can trade at a premium or discount to net asset value forever–a major disadvantage for investors, particularly if the fund fails to catch on.

Also, the fund’s key feature is a bit of a double-edged sword.

For starters, you must redeem the number of shares equal to a bar of gold’s value. At the current price, you must redeem 111 shares to receive actual gold–in other instances, you’ll receive cash.

But keep in mind that everyone else can redeem shares as well and the transactional costs and taxes from those redemptions will be borne by the fund’s remaining shareholders.

Assuming that the fund sold the gold at a higher redemption value than the original purchase price, the transaction would result in a gain that would be taxed at the current 28 percent collectible rate. But funds don’t pay taxes; the bill gets handed to its shareholders, eating into returns.

Based on those factors, I would steer clear of Sprott Physical Gold Trust and stick with SPDR Gold Trust (NYSE: GLD). Although it doesn’t offer a redemption feature for physical gold, it does carry an extremely low expense ratio and closely tracks the price of physical gold.

Q: In the January issue you highlighted HSBC Holdings (NYSE: HBC) as a stock for growth. Thus far my investment has gone nowhere but down. What gives? Should I continue to hold? The uncertainty in the financial sector makes me nervous.–Nicholas Stephens

A: Shares of HSBC Holdings took a hit after the company announced disappointing full-year earnings; although net income increased to USD5.83 billion from USD5.73 billion in 2008, analysts has estimated that the bank would generate USD7.76 billion in earnings. Because HSBC commands a premium to its European peers, expectations for the bank were much higher.

Although pretax profits from its investment bank were up threefold, to USD10.5 billion, overall profits suffered from higher credit provisions for bad loans. Losses from HSBC’s discontinued US consumer finance operations weren’t unexpected; management has been winding down this portfolio since March at an annualized rate of just under 21 percent. But loan impairments hit the company’s operations in the Middle East, where charges jumped fivefold to USD1.3 billion.

Meanwhile, HSBC’s Asian operations remained relatively flat. Pretax profit in Hong Kong was $5 billion, down from $5.4 billion in 2008, and pretax profit in the rest of the bank’s Asian-Pacific businesses was $4.2 billion, down from $4.7 billion in 2008.

That being said, this disappointing news didn’t incite an avalanche of downgrades from analysts: 21 analysts rate the stock a “Buy,” 10 rate it a “Hold” and eight rate it a “Sell.” Only one analyst downgraded HSBC’s shares.

We continue to recommend the stock to long-term investors based on the company’s efforts to leverage its foothold in Asia to grow business and attract internationally-oriented customers.

Over the long term, management hopes to expand its global operations so that its operations in the EU, Canada and US account for just 20 percent of its business mix.

Thus far we like management’s moves in that direction. In 2008 the firm entered the Korean insurance market, became the first foreign bank to hold a 20 stake in a domestic Vietnamese bank, and doubled its network in Indonesia with the purchase of a major stake in Bank Ekonomi.

And last year the company received final approval from Chinese authorities to launch a joint insurance venture with Beijing-based National Trust Limited.

And spooked investors should consider the firm’s normalized profitability once it gets out from under its US consumer loan portfolio–not to mention the bank’s relatively limited exposure to stricter regulations in the US.

In the near term, the stock could receive a bump from a cyclical economic recovery, a development that would lower the severity of real estate loan delinquencies. We tend to side with analysts such as JP Morgan Chase’s (NYSE: JPM) Sunil Garg who regard this pullback as a buying opportunity for investors seeking long-term growth.