Gold has been a popular investment for thousands of years. It can be spent anywhere in the world. It can be used to diversify a portfolio or as a
hedge against inflation. It’s traditionally a stable, safe-haven investment when market volatility is high. And enthusiastic gold consumption by
China and India means that it’s currently in demand.
But buying gold -- at least in its physical form – is a pain. Transferring gold coins or bullion is inconvenient and risky. Commissions can be steep. Storing gold safely often means additional expense. Gold ETFs offer an easier way for the average person to invest in this precious metal.
ETF stands for exchange-traded fund. An ETF tracks a specific index or commodity, roughly like an index mutual fund. But it’s more convenient than a mutual fund, because while mutual funds can’t be traded until the end of the trading day, ETFs can be traded at any time of the day. They can also be bought on margin or sold short, making them a more versatile investment.
A gold-backed ETF is an exchange traded fund that tracks the price of gold, with gold as the underlying asset instead of stock.
There are three kinds of gold ETFs -- all of which track the performance of gold in different ways. They may be gold-backed, which means that the fund actually owns the gold bullion to back its shares. One share of a gold-backed ETF represents a fractional interest in the fund’s trust. But it’s important to note that investors who buy shares of gold-backed ETFs do not receive any actual gold – just the ETF shares.
Other gold ETFs track the performance of gold using options and futures contracts. A third kind of gold ETF consists of stock from companies closely associated with gold, such as mining companies.
Three gold ETFs that are most recommended are SPDR Gold Shares (symbol GLD), iShares Gold Trust (symbol IAU), and ETF Securities Swiss Gold Shares (symbol SGOL). At the end of 2011, these three gold ETFs had annual returns at or near 20 percent -- crushing the overall market.
Each of these ETFs is a gold-backed fund, and each has its own peculiar strengths and weaknesses. Which one you consider “best” depends on your circumstances and investment goals. Since all gold-backed ETFs track the price of gold, the determination of which is “best” will depend on diverse factors – things such as a fund’s liquidity, its expense ratios, or even the physical location of its gold bullion.
The gigantic SPDR Gold Shares, or GLD, is the largest gold ETF at $63 billion in assets. In August 2011, it was, briefly, the largest ETF in the world, surpassing even the SPDR S&P 500 ETF. The GLD trust holds more physical gold in reserve than some countries. GLD's share price represents about 1/10th the price of an ounce of gold.
At time of publication, The Street.com website rated GLD a “buy” and the Zacks Investment Research website named it first in a list of “our favorite products in the gold ETF space.” Analysts who recommend GLD point out that its huge volume gives day traders the liquidity they need to make their trades easily and quickly. However, trading GLD requires some capital – at time of publication, it was trading near $160 a share. GLD also charges 0.4 percent in fees a year, more than some other ETFs.
The second gold-backed ETF is iShares Comex Gold Trust, or IAU, coming in at a much smaller, but still formidable, $8 billion in assets. IAU shares are much more affordable than GLD shares, but represent a smaller amount of gold: the price of IAU represents about 1/100th of an ounce of gold, rather than 1/10th the price of an ounce, like GLD shares. Analysts who recommend IAU say that it’s more cost-efficient, charging investors only 0.25 percent in expenses a year. At the time of publication, IAU was trading near $16 a share.
The third most recommended gold ETF is ETFS Physical Swiss Gold Shares (SGOL). This smaller ETF has only $1.8 billion in assets, but is attractive to some investors because all of the fund’s gold is held in secure vaults in Switzerland. This may appeal to those who want to diversify the locations of their gold investments, or because they perceive Switzerland to be a safer repository for gold than the U.S. or the U.K. This ETF has an annual expense ratio of 0.39 percent, comparable to GLD, and at time of publication, it traded near $160.
Historically, only well-heeled or institutional investors traded in gold, but financial products such as gold ETFs have opened the door to smaller investors.
The ETF’s more affordable price, ease of use and liquidity make it a popular financial product and gives investors more ways to buy and sell this precious metal.
Investors also don't need to overpay for (gold) ETFs and stock transactions. For trading gold ETFs we recommend OptionsHouse brokerage firm,
that charges just $3.95 for stock or ETF trade. Read full Optionshouse Review.
Canadian citizens could also buy gold and have it stored safely for them through brokerage called Questrade
- read Questrade Review.
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