Gold Mutual Funds vs Gold ETFs: What's the Difference?
Although similar, gold mutual funds and gold ETFs are not the same thing. This article will clear up any confusion about these two financial products with a comparison of gold ETFs vs. gold mutual funds.
While gold ETFs are financial vehicles that track the price of gold, gold mutual funds are basically "a fund within a fund" that can include ETFs, gold mining stocks, and other assets related to gold.
There are many ways to invest in gold given the variety of investment vehicles available in the gold market. Gold funds are great for a passive investor who may not want to stay on top of market swings and manage an investment portfolio. For some people, they may prefer to buy gold ETFs or "digital gold" rather than buying physical gold bullion.
If you are looking for alternative ways to invest in the yellow precious metal without the hassle of managing a physical investment, you are at the right place.
Gold Mutual Funds Versus Gold ETFs
Instead of buying gold bars and gold coins, you can purchase shares of a gold mutual fund or gold exchange-traded fund. However, there are key differences between the two. By understanding the varying characteristics between gold mutual funds and gold ETFs, you can hopefully determine which best suits your investment strategy and financial goals.
The value of gold mutual funds and gold ETFs move with the gold price.
What Is a Gold Mutual Fund?
A gold mutual fund is a mutual fund invests in gold indirectly by investing in gold ETFs as its underlying asset. The best way to think of a gold mutual fund is that it is a fund within a fund. Gold mutual funds may also consist of equity shares of companies that engage in the mining, production, processing and other activities associated with the lifecycle of gold.
The objective of gold mutual funds is to make a profit over time through the appreciation of the investment. Gold mutual funds can move in the similar direction of the spot price of gold because the investments are correlated. Unlike gold ETFs, gold mutual funds are not traded during the day. Rather they are traded according to their net asset value at the end of the day.
Gold mutual funds are managed by professional asset managers or asset management companies who hand pick investments that attempt to beat the market. Investors who choose this option tend to pay higher expense ratios, which are the management fees associated with asset managers managing the fund. These fees tend to be higher than gold ETFs.
Gold investors should learn as much as possible before they start investing.
It’s important for investors to be mindful of expense ratios of gold mutual funds. This is because gold investments are not high-yielding investments like stocks. Thus the higher the expense ratio, the more that can eat into your overall investments returns over time.
Another aspect to keep in mind for gold mutual funds is that some may require a minimum investment. This means you may need to put a lump sum of money in the mutual fund up front in order to open one. If this doesn’t work for you, maybe a gold ETF is a better option because they tend to not require a minimum amount of investment.
What Is a Gold ETF?
Like gold mutual funds, investing in gold through a gold ETF can be a convenient and accessible way to gain exposure to the safe haven asset. The most popular are SPDR Gold Shares (GLD) and iShares Gold Trust (IAU). Unlike gold mutual funds, gold ETFs’ underlying asset is either stocks of gold mining companies or physical gold itself. For the most part, gold ETFs buy gold bullion, accumulating gold held in the vaults of major banks.
Similar to gold mutual funds, the market value of gold ETFs can move closely to that of the spot price of gold. Since ETFs can be bought and sold on major U.S. stock exchanges during the trading day, gold investors can easily move in and out of gold mutual fund shares, making this gold investment liquid.
Gold ETF holdings tend to track with the price of gold. Inflows and outflows from these liquid funds are monitored by the World Gold Council (WGC).
This makes a distinct difference between gold mutual funds and physical gold investing. While gold funds are more liquid than physical gold, they cannot be traded during the day (market hours in equity markets). Furthermore, tangible gold in physical form is bound to its location. It is not easily transportable and needs to be kept in a secure location.
Compared to gold ETFs, gold mutual funds offer a bit more risk exposure because they invest in gold stocks, which tend to be price sensitive. Gold stocks are companies that are involved in gold-mining-related activities. That said, investors have exposure to the quality of the gold company itself. This means you are subject to its fundamental company performance, the amount of debt the company carries, and the decisions the company’s management makes.
3 Reasons to Invest in a Gold Fund
1. Convenient Way to Invest in Gold
Gold funds are an easier way to gain exposure to gold compared to investing in physical bullion. You can either invest in gold mutual funds, which are professionally managed, or in gold ETFs, which can easily be traded on the market similar to stocks. Gold funds are popular among investors because they offer an accessible way to invest in the precious metal without having to manage a physical gold investment. If you want to purchase more shares, that can easily be done through your brokerage or investment professional.
2. Portfolio Diversification
Investors need to manage their market risk, and gold funds are a great way to diversify your gold investments. Mutual funds have different investments in their financial portfolio helping manage volatility. For example, if the overall market is down, the mutual fund may perform better than the broader market because one investment(s) can be performing better than another investment in the fund. Gold ETFs can also be diversified with different gold companies. So, if one company is performing poorly, this can be offset by another company in the ETF that could be performing better.
Gold funds can help investors protect their money against inflation. As prices of goods and services continue to stay elevated in the broader economy, inflation may persist for the time being. With this dynamic in place, it can be a wise move to invest in a gold fund to help hedge against inflation. It is an asset class that appeals to investors looking for protection from inflation and currency devaluation.
Gold Funds Versus Gold Stocks
We should also briefly discuss gold stocks. Compared to gold mutual or exchange-traded funds, gold mining stocks offer investors more direct exposure to the precious metal. Stocks, however, can be more risky than funds because their prices can fluctuate more than fund prices, and there may be an associated transaction cost with a broker. Gold funds offer a cushion of protection because they are diversified assets. The funds hold a mix of different companies, which helps investors manage market volatility and protect against downside market risk. Both are subject to capital gains tax.
Cart inside of a gold mine.
Gold is a commodity that investors hold as a long-term investment to hedge against inflation. But keep in mind that whether you choose to invest in the yellow metal through an ETF or mutual fund, there are still investment risks. However, the risks are mitigated because gold funds are diversified investments compared to gold stocks, which are price volatile. With gold stocks, you have to keep up with how the company is performing and take a more active investing approach. This involves monitoring how the company and stock performs.
Written by Paulina Likos
Read more about investing in gold from the author and the Gainesville Coins editorial team: