Home Money 5 Things to Know about Gold ETFs

5 Things to Know about Gold ETFs

by Bruce Haring

The prices of gold bullion are on the rise again in 2016, after progressively decreasing the year before. In fact, the prices have increased around 16 percent since December 2015; an ounce of gold now costs approximately $1,348.70. The soaring price of the gold is one of the reasons a plethora of investors in the US are focusing on Gold ETFs.

A Gold ETF or a gold exchange traded fund is composed of gold derivative contracts, which are sponsored by gold. However, it is very important to distinguish between gold ETFs and physical gold. In reality, when you own gold ETFs, you do not own any physical gold. Even when you decide to sell your ETF, you will get the cash equivalent of it, but you will not receive gold in any form.

The main aim of gold ETFs is not to own any gold, it is to benefit from the performance of the gold. This is especially useful in a case where your investment portfolio is being hurt when the dollar is weak. As gold prices tend to rise during such period, investing in a gold ETF may help shield you against this type of financial loss. The thing to remember is it will only help the investor if gold prices are increasing.

If you are considering investing in a gold ETF in this soaring market, then there are some things that you need to know about Gold ETFs. They include:

  1. There are other options apart from GLD.

More often than not, investors who are planning to buy gold ETFs will invest in SPDR Gold Trust (GLD). This is the top dog when it comes to gold ETFs because of its huge trading volume as well as its assets that are over $35 billion. However, this is not your only option. There is another gold ETF in the market that may be ideal for you, the iShares Gold Trust (IAU). Even though this ETF is often overlooked, it does have $8 billion in assets and quite a robust volume.

When you compare it to GLD’s expense ratio (40 basis points), IAU has a reasonable ratio (25 basis points). In short, if you are a long term investor or have a habit of buying in smaller quantities, IAU is a better bet for you. On the other hand, for large investors and traders, GLD may be a better option.

  1. SPDR Gold Trust holds a serious amount of gold.

It is an enlightening aspect that GLD owns a plenitude of gold because an astounding number of investors are interested in gold-backed ETFs today. In fact, GLD is considered to be one of the world’s top ten holders of gold. It is even ahead of countries such as India and UK as well as the European Central Bank. This, along with the other ETFs, this makes gold exchange traded funds a force to be reckoned with in the world.

  1. There is something called gold future ETFs.

Since gold is a precious metal, it has a comparatively high ratio of ‘value-to-size’. Because of this reason, investors have a choice between physically-backed ETFs such as IAU and GLD and futures-based funds such as UBG and DGL. One of the key things to remember is that these future ETFs can be more expensive than the physically-backed ones, and can also suffer from several future curve issues.

  1. ETFs may actually help boost gold prices.

According to the World Gold Council, the only change in gold demand in this quarter was from gold ETFs. It shouldn’t be a surprise that the gold prices may actually be affected by the gold ETFs. After all, the ETFs do own a major chunk of the gold supply in the world.

  1. Gold ETFs are not a protection against any adverse economic conditions.

If your main purpose in buying gold ETFs is to protect your wealth in any economic calamity, you need to reconsider this notion. ETFs only track the gold price, they are not physical gold. You will not get any physical gold even if you redeem your gold ETFs. VanEckMerk Gold Trust ETF is the only ETF that offers physical delivery of the commodity. If you want to use gold to protect your wealth, you would be better off buying gold coins or gold bars.

It is crucial to research gold ETFs before you invest in them because there is a lot of moving parts and concepts to understand here just like there is for any type of investment.


You may also like