In the ever-evolving landscape of investment options, gold has consistently held its allure as a reliable store of value and a hedge against economic uncertainties.
For many years, investing in physical gold and the gold mining industry has been the best choices for many people. However, introducing gold ETF investments has completely transformed the game. It now offers a new and exciting way for individuals to tap into the world of precious metals.
This guide will help you understand the world of Gold ETFs and precious metals. Join us as we explore what they are, how to invest in gold ETFs work, the benefits they offer investors, and how you can buy them.
Gold ETFs are like a shortcut for investors who want to ride the waves of gold’s price without the hassle of physically handling the shiny stuff. These investment options let you get in on the action with just a few clicks instead of buying, storing, and selling actual gold bullion. How cool is that?
Gold ETFs are considered investment vehicles enabling investors like you to receive exposure to the gold’s price movement without buying, storing, and selling the precious metal directly.
These funds offer different approaches, with some tracking the gold price now, while others focus on investing in companies operating in the gold-mining industry.
Like other ETFs, the company issuing the gold ETF purchases stocks in gold-related companies or acquires and stores physical gold bullion. Investors can then buy shares in the ETF, which experience fluctuations in the value corresponding to changes in the underlying gold price or the stock value of the chosen companies.
Gold holds a reputation as a haven investment since its price often increases during periods of stock market decline. Recently, the price of gold has been approaching that record, making it an area of interest.
A Guide to Investing in Gold ETFs
Here are the steps to acquire shares in a gold ETF:
Step 1: Discover a gold ETF
To locate gold ETFs, you can typically search your broker’s website.
Some of the top gold ETFs based on their assets under management and popularity among investors include:
SPDR Gold Shares (GLD)
This ETF is one of the largest and most well-known gold ETFs. It seeks to track the performance of the price of gold bullion and holds physical gold bars in vaults.
iShares Gold Trust (IAU)
Similar to GLD, this ETF aims to track the price of gold by holding physical gold bars. It is also quite popular among investors.
Aberdeen Standard Physical Gold Shares ETF (SGOL)
This ETF holds physical bullion and seeks to track the performance of the gold price. It is backed by gold stored in secure vaults.
Invesco DB Gold Fund (DGL)
This ETF uses futures contracts to track the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. It provides exposure to gold price movements but does not hold physical gold.
VanEck Vectors Gold Miners ETF (GDX)
Unlike the previous ETFs that track the price of gold, GDX focuses on gold mining companies. It offers exposure to the performance of gold mining stocks.
VanEck Merk Gold Trust (OUNZ)
This unique ETF allows investors to own physical gold through shares and offers the option to convert shares into gold coins or bars.
Take note as well that the investment funds’ popularity and rankings can shift over time. Therefore, make sure you do your own homework. If necessary, seek advice from a financial expert before making any investment choices.
Step 2: Evaluate the ETF
Before purchasing shares in a gold ETF, there are two key factors to consider:
Five-year returns
Most gold ETFs are tied to the spot gold price, so the returns should align with the movements in the gold price.
Expense ratio
This represents the annual fee charged by the ETF, deducted from your investment. According to ETF.com, the average expense ratio for gold ETFs is 0.65%. Look for a low expense ratio.
There are also two essential cautions: Regular investors should avoid leveraged gold ETFs, which utilize financial derivatives and borrowed funds to speculate on future price movements. Additionally, it’s advisable to prevent gold exchange-traded notes (ETNs). Unlike ETFs, ETNs are debt obligations backed by the issuer and do not own the underlying gold. They carry a higher risk of credit default.
These investment options are more suitable for professionals and are not recommended for individuals pursuing a buy-and-hold strategy commonly favored by retirement savers.
Step 3: Purchase the gold ETF
You can acquire ETFs similar to buying stocks through an online broker. Implementing a strategy of regular purchases is a good approach, enabling you to benefit from dollar-cost averaging.
Why Invest in Gold ETF?
Did you know that investing in gold exchange-traded funds can be appealing for several reasons? Here are some of the reasons.
Diversification
Gold ETFs provide investors with exposure to the price movements of gold without physically owning the metal. Including gold in an investment portfolio can help diversify risk because gold often has a low or negative correlation with other asset classes like stocks and bonds. When other investments perform poorly, gold may act as a hedge and help protect the portfolio’s value.
Ease of investment
Gold ETFs offer a convenient and cost-effective way to invest in gold. They are traded on stock exchanges, which means you can buy and sell them quickly through brokerage accounts, just like stocks. This eliminates the need for storing physical gold and dealing with issues such as security and insurance.
Liquidity
Gold ETFs are highly liquid, meaning you can buy or sell them on any trading day at prevailing market prices. This allows investors to enter or exit their positions quickly without incurring significant transaction costs.
Transparency
Gold ETFs typically track the price of gold closely, as they are designed to replicate the performance of the underlying gold price. This transparency allows investors to know exactly what they are investing in and how the value of their investment is tied to the cost of gold.
Lower costs
On top of that, investing in gold ETFs can be a cost-efficient alternative to buying physical gold or other gold-related investment products. That’s because they often come with lower expense ratios than actively managed mutual funds or other gold mutual funds. That makes them a budget-friendly choice for many.
Accessibility
Gold ETFs open the world of gold investing to a diverse group, including regular folks like you and me. They offer an opportunity to tap into the gold market without requiring much money or extensive knowledge of trading gold through different means. By investing in gold ETFs, investors can participate in the potential benefits of gold as an asset class without the barriers associated with other investment methods.
It’s important to note that gold ETFs carry their risks, like any investment. Gold’s price can be volatile as well. Factors such as economic conditions, geopolitical events, and investor sentiment can influence its total price.
The Disadvantages of Buying Gold ETFs
While there are advantages to investing in gold ETFs, it’s essential to consider the potential disadvantages as well:
Price volatility
Gold prices can be highly volatile, experiencing significant fluctuations in short periods. This volatility can lead to potential price risks for gold ETF investors. If you need to sell your holdings during a downturn, you may experience a loss in value.
Counterparty risk
Gold ETFs are structured as financial instruments and are subject to counterparty risk. This means that if the issuer or custodian of the ETF encounters financial difficulties or fails, it could have an impact on the ETF’s value and the investor’s holdings.
Tracking error
While gold ETFs aim to track the price of gold, they may not perfectly replicate its performance. Factors such as fees, expenses, and tracking errors can cause discrepancies between the ETF’s returns and the actual price of gold. These discrepancies can result in a slight underperformance compared to the spot price of gold.
Storage costs and fees
Although gold ETFs eliminate the need for physical storage of gold, they still have associated costs. Investors must consider expense ratios, management fees, and brokerage commissions when investing in gold ETFs. These costs can eat into potential returns, especially during periods of low price appreciation.
Limited control over the underlying asset
When you invest in gold ETFs, you don’t own the physical gold itself. Instead, you have a claim on the fund’s underlying assets. This means you don’t have direct control over the gold, and you depend on the fund’s management for the custody and security of the gold holdings.
Inflation risk
While gold is often seen as a hedge against inflation, it’s not foolproof. Inflation expectations and economic conditions can impact gold prices differently over time. If inflation is lower than expected or other investment assets perform better during inflationary periods, the value of gold ETFs may not provide the desired protection.
Potential liquidity issues
Although gold ETFs are generally considered liquid investments, there can be liquidity issues during market stress or extreme volatility. In such cases, buying or selling ETF shares at desired prices may be challenging.
As with any investment, it’s essential to carefully evaluate the potential risks and rewards, assess your investment goals and risk tolerance, and consider seeking professional advice to make informed decisions.
