(Updates to clarify that existing gold ETF shares can be redeemed for bullion, but only in amounts of at least 100,000 shares.)

Those who invest in the Merk Gold Trust that Merk Investments put into registration last month will be able to redeem smaller amounts of shares of the proposed ETF for actual bullion—a marketing hook that sets it apart from existing physical gold ETFs and could put to rest reservations with gold ETFs that can’t readily be redeemed into actual gold.

“Investors who would like to take delivery of Gold Bars in exchange for their Shares (Delivery Applicants) may submit Shares to the Trust in exchange for Gold Bars,” the proposed ETF’s prospectus said—a new twist that may add to the allure of gold at a time when many believe it’s the only true store of value since the financial crisis of 2008-2009.

While it’s not at all clear that investors would even take advantage of this convertibility feature, it seems a fair bet that giving shareholders the option to turn their paper certificates into physical gold pretty much obviates objections raised by some of the more fervent gold holders who believe that gold—as in actual bars or coins—is really what investors should own.

More to the point, the plan might take off the table suspicions some gold investors have with physical gold ETFs that don’t allow for shares to easily be converted into actual gold. The most ardent gold bugs are quick to suggest that because current ETFs can’t be converted into bullion, it might be possible that they don’t actually hold gold. ETF sponsors are dismissive of such suspicions.

In the any case, it appears the Merk gold ETF will attempt to distinguish itself insofar as the amounts that can be redeemed can be as small as tiny bars of gold and even coins, whereas industry sources say existing gold ETFs require amounts equal to 100,000.

That 100,000-share threshold amounts to a sum equal at current prices to about $15.4 million for investors in State Street's SPDR Gold Shares (NYSEArca: GLD). In other words, it's outside the capability of individual investors and requires the involinvement of authorized participants, the big players at the center of every ETF's creation and redemption mechanism.

The Merk gold ETF, which will be listed on Arca, the New York Stock Exchange’s electronic trading platform, will come with an annual expense ratio of 0.40 percent, according to the fund’s prospectus, dated April 20. That’s the same annual fee as GLD's, the $67.35 billion physical bullion fund, which is the second-biggest ETF in the world.

The Merk Gold Trust, which will trade under the symbol “OUNZ,” will hold London “good delivery bars” as well as other gold bars and coins with a minimum purity of 995 parts per 1,000, according to the filing. The ETF’s net asset value will be determined at the end of the London trading day, meaning its price in New York could at times deviate from the end-of-day NAV.

The costs of redeeming OUNZ shares will go up the lesser the amount being redeemed, and any such redemptions won't be taxable events.

But reselling any shares converted into bullion will be taxable -- just one issue that would dog anyone who does redeem OUNZ shares for real gold. Indeed, where that gold will be stored and the value lost in all the transactions costs are likely to be exorbitant.

The Merk Gold Trust is the second ETF Axel Merk’s Palo Alto, Calif.-based firm has put into registration this year.

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