Investing in gold exchange-traded funds (ETFs) can be quite lucrative. The more you know about gold ETF before you begin investing, the more confident you’ll be. Knowledge and confidence are key ingredients to investment success. Read on to increase both and, with them, the worth of your portfolio.
Terminology: Worth Its Weight in Gold
Certain terms form the foundation for investing in gold. You’re sure to encounter the following key terms as you build your portfolio.
- ETF: A marketplace security that tracks, in the case of gold and other metals, a commodity and trades like a stock
- Commodity: A good or material that can be bought and sold
- Gold: A precious metal, valuable as a commodity, for jewelry-making, and more
- Gold Bullion: Pure (or nearly pure) gold in the form of bars, ingots, or coins; precious metals by weight
- Gold Fund: An ETF or mutual fund whose main investment is in gold bullion or gold-producing companies the price of shares within a gold fund are very close to the price of gold
You’ll encounter these terms both as you read this article and as you venture into the world of investing in precious metals like gold.
The Purpose of Gold ETFs
Investments in gold can be a key component of your investment strategy. Some investors always have ETF gold in their portfolios. Others, though, aren’t as enthusiastic. As with all other investment vehicles and strategies, there are both upsides and downsides to putting your money in gold, specifically exchange-traded funds.
Advantages of Gold ETFs
Gold ETFs serve multiple purposes, and with those functions come distinct advantages. These commodity ETFs:
- Offer the opportunity to enter the world of the performance of gold.
- Provide a hedge, or protection, against dollar and general market fluctuations
- Have the possibility of substantial financial gain
- Increase your exposure to new opportunities, such as foreign markets or the gold mining industry
- Helps you diversify your portfolios
There are indeed many benefits to investing in gold ETFs. Such investing isn’t without its drawbacks, however. Some disadvantages to precious metal commodity EFTs:
- You don’t own gold
- Gold trading is speculative so has a high risk of loss
- Gold ETFs don’t always have the same capital gain tax breaks as other ETFs
The overall purpose of gold ETFs is to make money and to offer protection against other market swings. Both advantages and disadvantages are inherent in the investment world. Knowing how the gold ETF investment process works can help you determine if the upsides are stronger than the downsides.
How Gold ETFs Work
Whether you’re an investor wanting to hedge your overall portfolio risk, gain exposure to the physical commodity, or put your money in something with a potential for a sizeable return, the process is the same. You’ll acquire the fund, monitor it, and eventually sell it or trade it.
For commodities such as gold, purchase an ETF though an authorized participant, typically a large financial institution. You’ll be buying an asset-backed contract signifying gold (as mentioned, you’re not buying the actual gold).
The authorized participant uses a custodian, again, another big financial institution, to store the bullion. Likewise, the custodian can use a sub-custodian to source and store the gold. Many parties can be involved in the process. The bottom line is that your ETFs are backed up by this gold. The more you know about who owns the gold and where it is stored, the more confident you’ll be about holding onto your ETF.
SPDR Gold ETF
SPDR, short for Standard & Poor’s Depository Receipts and sometimes called Spider, is a physically held gold ETF. Individual investors don’t buy a physical gold ETF, but they can invest in physical ETFs through SPDR, the largest (but not the only) physically backed gold exchanged tracked fun in the world.
SPDR Gold Trust (GLD) is a popular gold ETF because it gives investors exposure to and interaction with the gold market without have to buy, store, and sell actual gold. A SPDR gold ETF does all that for you, giving you freedom to control your investments.
Gold, or Gold Mining?
When you invest in Gold ETFs, you purchase a gold-backed contract to (ideally) grow you portfolio and your bank account. Another way to dapple in the precious metal commodity industry is with a gold miner ETF. With this, you invest in stocks of companies that are connected to the mining industry.
As with gold, gold miners ETFs offer hedges against inflation and market fluctuation. Mining ETFs include mines from around the globe, so they are diverse and offer great investment potential.
The gold miner ETFs are connected to the gold miners themselves, and when you invest, you are investing in the gold miners. The largest ETF in which to invest in gold miners is the Market Vectors Gold Miners ETF.
Top 5 Gold ETFs
Now that you’re armed with knowledge about gold ETFs, observe how some of the most popular investments funds perform. This will help you learn more and, ultimately, decide which ones you’d like to make part of your investment portfolio.
The following five gold funds are the top five gold ETFs as of November, 2017. Check out the full article on Investopedia for the full details on each of the five.
- SPDR Gold Shares (GLD)
- iShares Gold Trust (IAU)
- ETFS Physical Swiss Gold (SGOL)
- Power Shares DB Gold ETF (DLG)
- VanEck Merk Gold Trust (OUNZ)
Gold ETFs might not actually give you the gold, but they certainly have the potential to give you the glory. They offer a rich way to diversify your portfolio by purchasing exchange-traded funds that represent physical goal. Because these ETFs are speculative, they do have a risk, but they also have the potential for excellent return and reward.
This commodity investment is a great way to diversify your portfolio. Whether you’re seeking huge financial gain or are hedging other investments, gold ETFs can meet your needs. When you want to go for the gold without actually buying physical gold, consider turning to gold ETFs.