The two most popular types of gold investment include physical gold such as bullion, coins, and jewelry whereby the investor has ownership and gold stocks, which through the right company and appropriate diversification have potential for great profits. However, another possibility in building a solid wealth portfolio is by investing in gold ETFs, an acronym for Exchange Traded Fund.
As with any type of gold investment, it becomes imperative to gain the necessary knowledge so good decisions can be made and mistakes avoided. In this article, we wanted to answer frequently asked questions about investing in gold ETFs, great for people just entering the world of investment opportunities.
What are gold ETFs?
The first thing before actually investing in gold ETFs is to gain an understanding of what they are. As mentioned, ETF is the acronym for Exchange Traded Fund of which the only commodity and principle is gold. In this case, gold is used for backing opposed to physical gold by which an investor would have ownership or maintain possession of gold bullion, coins, or jewelry.
In simple terms, a gold ETF consists of both funds and stocks as a single product and as far as trade, this would be completed on a particular fund. This means the gold ATF is traded on most major stock exchanges. This type of investment was first introduced in the early 1990s in Canada, followed by an introduction to the United States, along with other markets a few years later. Prior to ETFs being offered, stocks and funds were usually separated to help reflect issues associated with liquidity.
To make it possible for investors to take advantage of a company’s growth and success, or perhaps growth and success of a commodity, the ETF was created. Although investing in gold ETFs is something typically seen with more experienced investors, with greater public education we are beginning to see less experienced investors choose this route.
What are some of the pros and cons of investing in gold ETFs?
As with any investment, gold ETFs have advantages and disadvantages but again, knowing what these are provides investors with an edge leading to success for high return on investment.
We will first address some of the pros for investing in gold ETFs to include:
- Online availability
- Timing flexibility for buying and selling
- Non-pay of stamp duty since this is paid on underlying investments)
Next, some of the main cons for investing in gold ETFs are listed below:
- Tax implications
- Zero control of ETF content or activities
- Varied costs for trading ETFs as distinct to ordinary shares
- Investors can only take cash – no gold redemption or delivery
- Gold ownership has no guarantee
- Annual management costs are often hidden due to being built into fund pricing
Who administers gold ETFs?
Special institutions have the responsibility for administering this type of fund, some better than others. Listed below are some of the best performing ETFs in the United States as an example of what investors should consider.
- streetTracks – Traded under the symbol GLD, of all gold ETFs in the United States, streetTracks is the largest. This institution stores gold bullion in bank vaults, which are then used to back investor holdings. That way, investors never have to mess with handling physical gold when it comes time to buy or sell. With streetTracks, gold bullion is held in the ETF fund as a trust whereby the investor would purchase just a portion when opening an account.
- iShares Comex Gold Trust – In this case, the trading symbol is IAU. While there are many great players in the gold ETF market, this one is considered among the most pristine. Having a solid history for gold ETF trading, this particular option has become extremely popular.
- PowerShares DB Gold Fund – DGL is the symbol under which this gold ETF is traded. When looking at the top funds, this one is ranked among the best 10 and a favorite choice by reputable gold bullion and coin dealers. An example of the capabilities of this fund is a return on investment of more than 1% within a year.
- ProShares Ultra Gold – For this, the trade symbol is UGL. While some options for investing in gold ETFs are fine for intermediate investors, this one is definitely for seasoned investors. Experienced investors would be able to handle high risk but also trade aggressively. Established as a double gold ETF, return on investment could double with the right increase in gold and share value.
- Market Vectors Gold Miners Fund – The symbol under which this ETF is traded is GDX. The way this fund was established was to mirror another fund called the NYSE: Arca Gold Miners Index. With this, an investor’s wealth portfolio would be backed by 32 mining companies with the ETF being comprised of gold company stocks. Because of this, tracking is on the gold stock index opposed to the gold price index.
How can money be made by investing in gold ETFs?
There is a specific way to make money when investing in gold ETFs. The expense ratio associated with owning GLD is 0.40%, which equates to 40 base points compared to other types of mutual funds that have expense ratios of more than 1% to 1.5%. With gold ETFs, no annual yield or dividend applies, which means for the investor, gains could only result from an increase in the share value of the fund.
An advantage of investing in gold ETFs and making money is that buying and selling is possible without assistance of a professional broker. In addition, these funds can be purchased and sold online during conventional market hours, the same way in which traditional stocks would be handled. The key to making a profit is to build up a wealth portfolio, followed by selling once value has increased significantly.