Gold is a popular way for investors to put their money into the market without taking a ton of risk. Though you can certainly buy physical gold, like gold bullion, the better option is to look into gold ETFs, instead. The price of gold is rising, but instead of buying physical gold, let’s consider a different way to invest in gold.
What are Gold ETFs
It’s best to start simply. An ETF is an exchange-traded fund, which gives an investor the option to invest in gold and silver, amongst other options, without directly purchasing, storing, and reselling these precious metals. Some gold ETFs out there directly track what gold prices are doing, but others are investing in companies that are part of the gold mining industry.
Across the board with ETFs, the company issuing the ETC buys the stock of a gold-based company, or they buy and store the physical gold bullion. People who want to invest in these ETFs buy shares in these funds, which rise and fall with the stock value of the company or with the price of gold.
Many people consider gold to be a “safe-haven” investment because typically when the stock market falls, the gold price rises. For example, when the stock market crashed in 2011, after September 11th, the price of gold hit a record. Currently, people are buying Gold ETFs like never before, and in just the first half of the year, people investing in gold spent more than $33 billion in gold ETF shares. It doesn’t look like it’s going to stop any time soon, so why not hop on? Here’s some information on investing in a gold ETF, and we will look at some of the best gold ETFs out there.
Finding a Gold ETF to Invest in
Vaneck Vectors Gold Miners ETF? SPDR Gold Shares? Which Should You Buy?
Most people find an ETF to invest in by simply searching through the website of the broker and opening a brokerage account. But, before you make an investment, you have to make sure that it is a solid option. Here are some of the most popular:
Analyze the ETF of Your Choice
Before you jump right in and buy Vaneck Vectors Gold Miners ETF, Vaneck Vectors Junior Gold Miners ETF, or another one of the best gold ETFs, you need to do a little bit of research. First, take a look at the five year returns.
Most of the best Gold ETFs, like iShares Gold Trust or SPDR Gold typically show returns that are in alignment with the price of gold, including gold bars and bullion. You also need to look at the expense ratios. This is the annual fee of the fund, which is paid out from your investment. Each of the exchange traded funds out there have a different fee, though the average is around 0.65% for gold ETFs. The bottom line is to find one that is a low cost option.
There are also two things to remember and be cautious about. First, in most cases, you should not buy any leveraged gold ETFs. These are typically more risky and performance is shaky, because they are essentially being used as a bet against the future price of gold. You also want to avoid gold-exchange-traded notes, or ETNs. These are secured debt obligations, also known as an exchange-traded fund, that do not actually own the physical gold (gold bullion, gold bars, etc.) Because these funds are also like bets, the performance can seem pretty risky in regard to credit default. Though you can make a lot of money with these funds, the risk might outweigh the potential rewards you get from these assets.
Buy the Gold ETF of Your Choice
Finally, it’s time to buy. You can buy these ETFs just like you buy a stock, essentially through an online broker. You may want to talk to a pro about the best way to buy these, as it’s a little different than trading on the stock market. The gold and bullion market has a lot of similarities to buying other assets, but many investors, especially new ones, need a little help before buying this commodity. If you are into owning physical gold, on the other hand, and want to hold it in your retirement portfolio, I suggest you contact one of these gold IRA companies.
Learning More About ETFs
As you know by now, investing in an ETF is very different than buying physical gold, gold bullion, or gold bars. In fact, it’s even better. In this case, you can actually buy commodities associated with gold mining companies or precious metal companies that are part of the industry as a whole.
Let’s look at how these assets under management work, and how they compare to other commodities. Comparing Mutual Funds and ETFs In many cases, choosing an ETF results in a lower cost of fees when compared to a mutual fund. So, many investors take advantage of this across the country from New York to California.
Let’s look at the expense ratio of a mutual fund and exchange traded fund. In 2019, the average expense ratio for mutual funds was 0.52 percent, and the expense ratio for an ETF, on average, was 0.18 percent. On top of these, ETFs also have tax advantages for investors.
There is typically a lot more turnover in a mutual fund, at least in those that are managed actively, than when compared to an exchange traded fund. Both are assets under management, of course, but this can result in capital gains, which lead to more taxes. Though there are more mutual funds out there when considering assets under management, ETFs are more popular all of the time. They do have different types of management structures, and mutual funds are more actively managed than ETFs. Comparing Stocks and ETFs Investors can trade both stocks and ETFs on the market, and both are assets that are important for people who want to strengthen their standing in regard to personal finance. All of these, from gold and silver to precious metals, are traded on exchanges, and you can see and track the activity thanks to the ticker symbol that they all have.
Each stock represents a specific company. Sure, it might be a precious metal company or a well-known company like Google or Getty Images. But, an ETF represents a group of stocks. For instance, you might have several mining companies in one group.
As you might imagine, when you have several mining companies in one fund, even if gold prices rise or fall, the other assets under management in the group may be doing well. This leads to more diversity. in your portfolio.
The Pros and Cons of Investing in Assets Under Management like an ETF
More than $507 billion was put into ETFs in 2020, which is a 55 percent increase from 2019. Investors are leaving things like investing in physical gold, and instead getting pulled into an ETF because they are simple, affordable, and offer more diversity when compared to single physical gold shares. Before we close, let’s take a look at the pros and cons of investing in an ETF:
Pros
Cons
Conclusion
From understanding the expense ratio or knowing how to invest in an ETF, we hope that this article has helped you to make a smart decision as an investor.
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started this website to share his expertise in using his Self-Directed IRA. Most recently he's been advising individuals to diversify into precious metals ahead of a certain recession. He invested with Goldco.