Gold Mutual Funds vs Gold ETFs: What's the Difference?
Gold Mutual Funds vs Gold ETFs: What's the Difference?
Compare gold investment vehicles to determine which option best aligns with your portfolio strategy and financial objectives
Introduction
Although similar, gold mutual funds and gold ETFs are not the same thing. This comprehensive comparison will clear up any confusion about these two financial products and help you determine which best suits your investment strategy.
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.
Investment Alternatives
There are many ways to invest in gold given the variety of investment vehicles available in the gold market. Gold funds are great for passive investors who may not want to stay on top of market swings and manage an investment portfolio actively. 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.
Table of Contents
Gold Mutual Funds vs Gold ETFs Overview
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.
Gold Mutual Funds
- "Fund within a fund" structure
- Professionally managed portfolios
- Higher expense ratios
- End-of-day trading only
- May require minimum investment
Gold ETFs
- Direct gold exposure
- Lower expense ratios
- Real-time trading during market hours
- High liquidity
- No minimum investment requirements
The value of both gold mutual funds and gold ETFs move with the gold price, making them correlated investments that can provide exposure to precious metals without the complexities of physical ownership.
What Is a Gold Mutual Fund?
A gold mutual fund is a mutual fund that 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.
Investment Structure
- Invests in gold ETFs as underlying assets
- May include gold mining company stocks
- Diversified across multiple gold-related investments
- Professional asset management oversight
Trading Characteristics
- Traded at net asset value (NAV)
- Pricing occurs at end of trading day
- No intraday trading opportunities
- Settlement typically T+1 or T+2
Professional Management Considerations
Gold mutual funds are managed by professional asset managers or asset management companies who hand-pick investments that attempt to beat the market. The objective is to make a profit over time through the appreciation of the investment. However, investors who choose this option tend to pay higher expense ratios, which are the management fees associated with asset managers managing the fund.
Cost Considerations
It's important for investors to be mindful of expense ratios of gold mutual funds. Since gold investments are not high-yielding investments like stocks, higher expense ratios can significantly eat into your overall investment returns over time. These fees tend to be higher than gold ETFs due to active management.
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 upfront 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.
Popular Gold ETFs
- SPDR Gold Shares (GLD)
- iShares Gold Trust (IAU)
- Aberdeen Standard Physical Gold Shares (SGOL)
- GraniteShares Gold Trust (BAR)
Underlying Assets
- Physical gold bullion holdings
- Gold stored in major bank vaults
- Some focus on gold mining stocks
- Transparent holdings reporting
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.
Liquidity and Trading Benefits
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 ETF shares, making this gold investment highly liquid. This creates a distinct difference between gold mutual funds and physical gold investing.
While gold funds are more liquid than physical gold, mutual funds cannot be traded during market hours like ETFs can. Furthermore, tangible gold in physical form is bound to its location, is not easily transportable, and needs to be kept in a secure location.
Detailed Comparison Analysis
Risk Profile Differences
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 involved in gold-mining-related activities. This means you are subject to the fundamental company performance, debt levels, and management decisions of these companies.
With gold mutual funds, investors have exposure to the quality of individual gold companies. This means you are subject to their fundamental company performance, the amount of debt the company carries, and the decisions the company's management makes—factors beyond just gold price movements.
3 Reasons to Invest in Gold Funds
1. Convenient Gold Exposure
Gold funds are an easier way to gain exposure to gold compared to investing in physical bullion. You can invest in professionally managed gold mutual funds or easily traded gold ETFs without managing physical gold storage.
2. Portfolio Diversification
Gold funds help manage risk through diversification. Mutual funds have different investments in their portfolio, helping manage volatility. If one investment performs poorly, it can be offset by better-performing holdings.
3. Inflation Protection
Gold funds can help investors protect their money against inflation. As prices of goods and services remain elevated, gold funds provide an asset class that appeals to investors seeking protection from inflation and currency devaluation.
Professional Portfolio Management
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, unlike the logistics required for physical gold purchases.
Gold Funds vs Individual 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 individual companies but come with additional risks.
Individual Gold Stocks
- Direct company exposure
- Higher potential returns
- Higher volatility and risk
- Requires active monitoring
- Company-specific risks
Gold Funds Advantages
- Diversified holdings
- Risk mitigation through diversification
- Professional management
- Lower volatility
- Easier portfolio management
Risk Considerations
Stocks can be more risky than funds because their prices can fluctuate more than fund prices, and there may be associated transaction costs with a broker. Gold funds offer a cushion of protection because they are diversified assets holding a mix of different companies, which helps investors manage market volatility and protect against downside market risk.
Gold is a commodity that investors hold as a long-term investment to hedge against inflation. 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 individual gold stocks, which are more price volatile.
With individual gold stocks, you have to keep up with how each company is performing and take a more active investing approach. This involves monitoring how the company and stock performs, analyzing financial statements, and staying current with industry developments.
Choosing the Right Investment Vehicle
The choice between gold mutual funds and gold ETFs depends on your investment goals, risk tolerance, and trading preferences. Both can be subject to capital gains tax, but they serve different investor needs.
For Beginning Investors
If you're new to gold investing and prefer professional management with a "set it and forget it" approach, gold mutual funds might be appropriate despite higher fees. However, if you want lower costs and more control, gold ETFs offer an excellent starting point for building precious metals exposure alongside silver investments.
For Active Traders
Active investors who want to capitalize on intraday gold price movements should prefer gold ETFs for their real-time trading capabilities and lower expense ratios. The ability to trade during market hours provides tactical advantages for timing entries and exits based on gold price movements.
For Long-Term Wealth Preservation
Sophisticated investors building long-term wealth preservation strategies might consider combining both approaches or even incorporating physical gold ownership alongside paper gold investments for maximum diversification and protection against systemic financial risks.
Choose Gold Mutual Funds If:
- You prefer professional active management
- You're comfortable with higher fees
- You don't need intraday trading
- You want diversified gold exposure
- You meet minimum investment requirements
Choose Gold ETFs If:
- You want lower expense ratios
- You prefer real-time trading capability
- You want direct gold price tracking
- You have a smaller initial investment
- You prefer tax efficiency
Conclusion
Both gold mutual funds and gold ETFs offer valuable ways to gain precious metals exposure without the complexities of physical ownership. The choice between them depends on your specific investment objectives, cost sensitivity, and trading preferences.
Gold ETFs generally offer lower costs, greater liquidity, and more direct gold price tracking, making them suitable for most investors seeking straightforward gold exposure. Gold mutual funds provide professional management and potentially broader diversification but come with higher fees and less trading flexibility.
Investment Strategy Recommendation
Consider your investment timeline, risk tolerance, and cost sensitivity when choosing between these vehicles. For many investors, starting with lower-cost gold ETFs provides an excellent introduction to precious metals investing, which can later be complemented with physical gold ownership or silver investments for additional diversification.
Remember that both vehicles provide exposure to gold price movements but don't offer the same benefits as physical precious metals ownership, such as true portfolio insurance during systemic financial crises or complete independence from financial system counterparty risks.