What Is a Gold ETF?

Gold has been alluring for a very long time. Thanks to this, people have managed to invest in the precious metal in many different ways based on their comfort levels, risk profiles, available capital, levels of understanding, and more.

There are the more direct approaches such as simply buying physical gold bullion. On the other side, some people may not have wanted exposure to the physical gold market, which meant going other routes such as investing in gold mining companies by owning shares.

One of the most attractive approaches is to invest in gold ETFs. A big part of the attractive element is the fact that diversification is built into the way ETFs work, allowing for some level of protection against one stock’s failure.

Today, we’d like to take a moment to help you understand everything you need to about gold ETFs.

Why Invest in Gold?

As we indicated before, gold ETFs investors are usually trying to capitalize on the principle of diversification. After all, when your portfolio depends too heavily or totally on a single asset, you find yourself in a situation where there is too much exposure.

Beyond a better spread, there’s also the matter of inflation. Historically, gold has served as a hedge against inflation. The state of a Fiat currency does not exactly influence gold prices in the same direction. That’s why during periods of high inflation, gold became sought after as it holds its intrinsic value very well.

A part of this is the fact that gold is realistically a finite resource. Even though all of it may not have been found, there’s no more available than the amount that currently exists.

Periods of social or political turmoil in the past have been characterized by investors running to gold holdings as their safe haven.

What Are Gold ETFs?

Before jumping specifically into the gold version, it helps to understand how exchange-traded funds work as a whole. These are what you called pooled investments. That’s because the underlying structure is a collection of different assets, which may include commodities, stocks, or bonds.  In this case, it’s a non physical investment in gold.

It’s like getting a collection in a metaphorical basket, which means exposure to a selected commodity, sector, or industry. By going this route, you get to achieve diversification without the need to try to find different assets to invest in yourself.

Now let’s bring things back to the precious metal. A gold ETF, of course, will be using gold as the underlying asset. This means that an ETF’s value will have a positive relationship with the price of gold. If gold gets more expensive, then the ETF becomes worth more. The reverse is also true.

As far as buying ETFs goes, this can be done with the help of a stock exchange, even online, in the same way you would purchase stocks. You will need to establish what your trading strategy will be, especially since prices can change daily as ETFs are being traded.

Note that there are both active and passive management methodologies for these funds, though the passive variation is more widely used.

What Makes Gold Exchange-traded Funds Beneficial?

Gold ETFs

Let’s take a moment to talk about the benefits those who have leveraged gold ETFs have enjoyed and that others can capitalize on in the future:

  1. We’ve already covered how ETFs for gold help with diversification, thanks to the fact that there are multiple elements to the portfolio.
  2. The cost implications of a gold ETF are lower. If you were to buy gold in its physical form, the price alone would be one challenge. Beyond that, you’d need to think about paying for insurance and covering whatever storage costs would come along with your ownership too. Additionally, you’re not paying as much as you would if you were to buy individual stocks.That’s because doing so would mean that there are multiple transactions at play, which introduces the challenge of dealing with multiple commissions. If you want to dial into savings even more, we would suggest going with passively managed ETFs since index tracking is built into the way they work, eliminating the need for frequent input and analysis from a broker.
  3. There’s also the tax efficiency side of things. The design of ETFs means that capital gains are fewer than those of mutual funds. Of course, this becomes even more apparent if there is a passive management style going on. Remember that capital gains are taxable, so this translates to you keeping more of your money.
  4. You don’t need to have a ton of money to be able to invest in ETFs. That’s because you can make your purchases by share. If you were supposed to opt to invest in mutual funds, for example, you wouldn’t be able to capitalize on this benefit with such a pooled investment style. We would say prepare to deal with a minimum investment of up to $3,000.
  5. The liquidity of ETFs is also another element that makes them desirable. You don’t need to wait till the end of the day to trade them. It makes capitalizing on prices in real time a possibility.

What Are the Drawbacks for Gold Investors?

Remember that there is no such thing as a foolproof investment or one that will never see you having losses. At the end of the day, investing in anything is a risk, and your job as an investor is to understand your risk profile and invest based on that. Let’s take a moment to look at some of the disadvantages that come with investing in gold.

First, gold valuations are not always the easiest things to estimate. After all, what kind of cash flow metrics or earnings would you be using as an evaluation point?

It’s also useful to remember that gold is not a yielding asset. So, if you’re looking for dividends or another form of passive income, then you’d best turn your focus to another type of investment.

Remember that even with the tax advantages that ETFs can bring, much of it depends on the type of assets owned. Profits that you earn from the sale of your ETFs can end up being taxed as collectibles and not ordinary investments. Functionally, this means that the amount of tax you deal with could be quite a bit higher.

Bear in mind though that these regulations apply only to any investments outside of tax-advantaged accounts such as an IRA or a 401(k).

How Buying Gold ETFs Works

Let’s now look at how to buy gold ETFs. As you select yours, there’s the consideration of if you prefer the route of public companies that do gold mining or if you wish to be exposed to the physical gold. Bear in mind that the level of risk you take on for each of these is much different. Here are the steps to guide your investment strategy:

  1. You need to start by finding the ETF that you’re interested in. There are many of them out there and using your preferred brokerage, you can work with the type that is most appealing to you. Below, we’ll take a look at some of the best gold ETFs out there.
  2. Take the time necessary to do a proper analysis of the ETF that you’re interested in. Remember that they can be backed by gold-related assets or the gold itself, so make sure you ascertain which is the case, so you’re choosing the one that works best for you. A good idea is to seek the counsel of a financial advisor alongside doing your own research.
  3. Compare the ETFs based on their fund performance, underlying assets, liquidity, and expense ratio. A fund’s prospectus will give you all of these details for you to be able to determine its viability.
  4. Finally, you can go ahead and buy whichever ETF is appealing to you. The buying is the easy part, which is why you need to spend a lot of time just ensuring that you’ve made the best selection. Simply initiate the transaction through your brokerage account, and you’re good to go!

More Content on Gold ETFS:

SPDR Gold Shares

This is both the most liquid and the largest ETF out there. If you’re looking for direct exposure, then this stands atop the best gold ETFs you could consider.

VanEck Vectors Gold Miners ETF

As far as holding shares of major gold mining stocks goes, this is the largest ETF option you have. Remember that these shares can sometimes outperform the price of the precious metals themselves.

SPDR Gold MiniShares Trust

This is a lower-cost variation of the first option. Cost-conscious retail investors can go this route to retain their market share against competitors such as the iShares Gold Trust.

iShares Gold Trust

Speaking of this one, it’s almost the same thing as the iShares Gold Trust. However, there’s a lower expense ratio, which means it will cost you less to expose yourself to physical gold.

VanEck Vectors Junior Gold Miners ETF

The focus here is on smaller mining companies, which could sometimes mean higher returns from greater production expansions.

Wrapping Up

Buying physical gold, going for futures, or investing in mutual funds are all ways to invest in gold. However, ETFs p[provide an avenue that allows for diversification to protect your portfolio from one mishap.

Tim Schmidt


Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.