How To Invest In Gold ETFs
Gold exchange-traded funds are investment vehicles that track the performance of physical gold. Gold ETFs are passive investment securities. They provide the flexibility of getting exposure to the benefits of gold by bundling up gold stocks into one ETF.
You can find gold ETFs listed on major stock exchanges. They can easily be bought and sold through a brokerage.
Gold ETFs tend to perform similarly to individual stocks. Yet unlike stocks, ETFs provide some downside protection since there is built-in diversification.
If you are interested in allocating money toward the yellow precious metal while hedging your investments, here’s what you need to know before investing in gold ETFs.
3 Reasons to Buy Gold ETFs
1. Gold ETFs Are Easily Accessible
There are many benefits to owning gold ETFs. The first is that gold ETFs are easily accessible and readily available since they are listed on major stock exchanges.
You can buy into a gold ETF and gain access to the gold market within a few minutes by choosing a brokerage to quickly buy and sell a gold fund. This is an easy way to manage your investments compared to owning physical gold where you have to manage its storage and delivery.
Gold ETFs have low barriers of entry. This means it doesn’t require the investor to have a lot of money to start out with. With gold ETFs, the fees associated include the fund’s expense ratio, which is the management fee. This tends to be a very small amount.
Ease of access is one of the biggest advantages of owning gold ETFs.
2. Gold ETFs Are Liquid Assets
Gold, the underlying asset that gold ETFs follow, is a liquid asset itself. Therefore, Gold ETFs are liquid assets as well.
An asset that has liquidity means it’s an asset that can be quickly bought and sold and converted to cash. If you are an active investor who wants to quickly move in and out of positions, liquidity is a valuable characteristic in an investment because you have more possibilities of making a profit.
3. Gold ETFs Can Provide Diversification
Gold ETFs offer an easy way to diversify your assets. With a gold ETF, you will get multiple assets like gold-related stock and bonds, all within one fund, rather than having to buy them individually.
A diversified gold portfolio can help you manage market volatility and hedge your risk in times of economic uncertainty. If you want to take out the heavy lifting of building a portfolio, owning a gold ETF offers a balanced way to invest across different assets, including precious metals like gold.
3 Best Gold ETFs to Consider
1. SPDR Gold Shares (GLD)
You can access the gold market through the SPDR Gold Shares ETF. GLD is the first US-traded gold ETF and the first US-listed ETF backed by a physical asset.
The goal of the fund is to track the performance of the price of gold bullion minus the fund’s expenses. The fund has an expense ratio of 0.4% and a market value of $185. GLD has an annualized 10-year total return of 1.07%.
This State Street fund has a trustee, The Bank of New York Mellon, that handles the management of physical gold, which is the gold that ETF is backed by. This trustee is subject to audits and inspections to ensure its proper management. The GLD fund represents fractional, undivided beneficial ownership interest in the Trust which includes gold bullion and sometimes cash.
GLD holds gold in the form of large gold bars.
2. iShares Gold Trust (IAU)
Another gold fund similar to GLD is IAU. This gold ETF seeks to reflect the general performance of the price of gold.
The fund has more than $32 billion assets under management and holds an expense ratio of 0.25%. The total annualized return for the past 10 years has been 1.23%. Just like GLD, IAU is a great investment tool if you want to diversify your investment portfolio and protect your assets against rising inflation.
IAU holds physical bullion held in vaults around the world with a location in New York, New York and another in London, United Kingdom. The total bars held in both locations are 40,433 and total gross troy ounces are more than 16 million. This is a suitable option for buy-and-hold gold investors to get exposure to physical gold without actually owning it with a competitive, low ETF expense ratio.
3. VanEck Vectors Junior Gold Miners ETF (GDXJ)
This VanEck fund offers investors exposure to gold miners that are small in company size or are in the early and exploratory phases of their business. The goal of the fund is to replicate the performance of the MVIS Global Junior Miners Index. This index aims to track the overall performance of small capitalization companies involved in mining gold or silver.
As of Feb. 28 2022, GDXJ has 100 holdings including Pan American Silver Corp (PAAS), Yamana Gold Inc (AUY) and Evolution Mining LTD (EVN) to name a few. The fund was created in November 2009, holds a management fee of 0.52% and has a market value of about $47.
Since the miners in the fund are in their early stages, this fund allows you to have exposure to smaller companies that may have higher upside potential. However, this potential for higher reward comes with added risk.
Risks of Investing in Gold ETFs
When investing in gold ETFs, you are getting exposure to the precious metal but you are not investing directly in the commodity itself. Rather, you are either investing in a fund that holds physical gold.
That said, the fund is pegged to the current price of gold. If the fund holds gold mining stocks, again, you are not investing in physical gold. Instead you are investing in companies that work in the gold industry.
If you own physical gold, it's a pure asset that is fully owned by the owner. Rather, if you invest in gold stocks or gold ETFs, there is a risk, albeit small, that the publicly-traded gold company can default. Physical gold cannot default because it is an actual asset that has maintained its value over many years.
Gold ETFs can perform similar to gold stocks since they are both traded on the stock market. That said, when investing in gold ETFs, their price can fluctuate daily. Their value can change on an intra-day basis similar to how the stock market has volatility in the short-term. The price of gold can also change during the day, but it tends to be less active than gold stocks and ETFs.
Alternatives to Gold ETFs
Physical Gold
Gold investors can hold pure gold in either coin or bullion form. You can put it into storage or hold it at your home.
Keep in mind, if you hold your gold in storage, you have to pay a storage fee. You also have to consider the cost of delivery and the other transportation fees.
Physical gold bullion can come in the form of coins or bars.
Gold Stocks
You can buy gold ETFs at their current market value. Shares of gold ETFs trade like stocks and are subject to the same investment risk as stocks since their market value can fluctuate.
Changes in the price of gold can influence the price of gold stocks and gold ETFs, however. Since an investor would be more concentrated in a gold stock position, you may see more fluctuation with a gold stock investment compared to a gold ETF investment. This is because an ETF has multiple assets bundled in one investment vehicle, which allows you to manage the risk of market volatility.
For many investors, the costs of buying shares of gold ETFs and expenses associated with the purchase are lower and more cost-effective than buying physical gold bullion or coins. This is especially true when considering either stock volatility or the storage, insurance, and transportation of physical gold.
Conclusion: Gold ETFs May Have a Place in Your Portfolio
Investing in gold ETFs allows long-term gold investors to get exposure to the precious metal without owning physical gold. Gold ETFs are a convenient, easy-to-access and liquid investment vehicle that offers investors the opportunity to quickly trade gold investments on the stock market.
While gold ETFs hold many benefits, this investment vehicle is not without its risks. Gold ETFs are subject to volatility and while you have exposure to gold with an ETF, you do not have all the benefits associated with owning your own physical bullion.
According to each investors’ long-term investing strategy, goals, and risk tolerance, gold ETFs could be a suitable option for diversifying your portfolio with gold.
Written by Paulina Likos
Read more about how the gold market works from the experts at Gainesville Coins:
Investing in Gold For Beginners
How to Sell Coins: 5 Best Tips
Gold vs. Cash: Comparing the Pros and Cons