What You Need to Know About Gold ETFs

- May 7th, 2019

Interested in investing in gold ETFs? Here’s a breakdown of what you need to know about gold ETFs, from what they are to how they work.

Although exchange-traded funds, or ETFs, have existed since the 1990s, their prevalence in the market became most notable in the early 2000s.

Gold-focused ETFs became popular as a result, and they remain a good option for investors who want exposure to the precious metal without personally trading physical gold, gold futures or gold stocks.

Read on for a more in-depth overview of what gold ETFs are and how they work, including why they are a sound investment and the top five gold ETFs you may want to invest in. 

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What is a gold ETF?

Like all other ETFs, gold ETFs act in the same manner as individual stocks, meaning that investing in a gold ETF is similar to trading a stock on an exchange.

There are two main types of gold ETFs: those that track any price changes that the metal goes through and those that deal with investing in gold companies.

ETFs that follow the price of the yellow metal give investors access to gold by holding either physical gold bullion or gold futures contracts. It is important to keep in mind that investing in these gold ETF platforms does not allow investors to own any physical gold — even a gold ETF that tracks physical gold cannot be redeemed for actual gold.

Meanwhile, ETFs that invest in gold companies provide exposure to gold mining, development and exploration stocks, as well as gold streaming stocks.

The benefits of purchasing a gold ETF

As mentioned, gold investors have plenty of options for getting exposure to the yellow metal, including investing in gold bullion, gold futures and gold stocks. But gold ETFs are often considered a lower risk investment and have a number of benefits for market participants.

For example, physical gold is known for being a hedge against economic and political uncertainty, and owning shares of a physical gold ETF provides investors with this same security — without the hassle of buying and storing the yellow metal.

Since gold tends to rise when the US dollar is weak, purchasing a gold ETF could balance out any investment that has the potential to decline when the greenback does. Conversely, selling gold ETF holdings can be beneficial when the US dollar is making gains.

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Gold ETFs that track gold companies let investors access multiple companies in the space rather than choosing specific stocks. This is an appealing option for those who want exposure to the sector without having to make minute decisions.

Gold ETFs as a whole also offer security in that they are managed by yellow metal experts, so there is a better chance of making a profit than going it alone. Of course, it is important to keep in mind that, despite their less risky nature, gold ETFs are still affected by the rise and fall of gold prices.

Mutual funds are often compared to ETFs, but in the case of gold ETFs, there are some tax advantages that make them more desirable than traditional mutual funds. ETFs typically garner fewer capital gains when compared to mutual funds, because there is no necessity that ETFs sell the underlying securities in order to finance investment inflows and outflows. Due to this factor, those who hold gold ETFs over mutual funds will generally owe less come tax time.

Lastly, due to the fact that mutual funds can only be bought or sold at the close of the trading day, gold ETFs become more beneficial as they can be traded whenever the stock market is open, meaning movement is more free and not tied down by the end of day trades.  

What are some popular gold ETFs?

Once you understand what is at the core of gold ETFs and how they could be a beneficial asset to a portfolio, the final step is determining which gold ETFs are the best. While it depends on the investor, the five gold ETFs below may be worth considering. According to ETFdb.com, they were the largest gold ETFs by asset value as of May 7, 2019.

1. SPDR Gold Trust (ARCA:GLD)

Total assets: US$33,014.16 million

The SPDR Gold Trust tracks the spot price of gold bullion and is determined by market forces in the 24 hour, over-the-counter market for gold. This market accounts for most global gold trade, and any quoted prices available to ETF investors reflect the latest available information.

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2. iShares Gold Trust (ARCA:IAU)

Total assets: US$12,682.33 million

The iShares Gold Trust also aims to track the spot price of gold bullion. Its expense ratio for investors is 0.25 percent, and its holdings are allocated solely to physical gold bullion. IShares strives to have the trust’s value reflect the performance of the price of gold.

3. Aberdeen Standard Physical Swiss Gold Shares

Total assets: US$890.15 million

Aberdeen Standard Physical Swiss Gold Shares are issued by the Aberdeen Standard Gold Trust (ARCA:SGOL). The goal of the trust is for its shares to reflect the performance of the price of gold bullion, less the trust’s operating expenses. The shares trade on an exchange like any other security, and can be created and redeemed as supply and demand in the market dictates and allows.

4. SPDR Gold MiniShares Trust (ARCA:GLDM)

Total assets: US$653.97 million

The SPDR Gold MiniShares Trust offers investors one of the lowest available expense ratios for a US listed physically gold-backed ETF. This ETF represents fractional, undivided beneficial ownership interests in the trust, which holds only physical gold bullion and, from time to time, cash.

5. GraniteShares Gold Trust (ARCA:BAR)

Total assets: US$466.81 million

GraniteShares’ ETFs are designed to seek the performance of the price of gold, less trust expenses. The company prides itself on being among the lowest cost physically backed gold ETFs on the market.

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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.

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