Gold ETFs

ETFs or Exchange Traded Funds are traded on an exchange similar to stocks. And, just like stocks, their prices fluctuate constantly throughout the trading day.

This is where exchange traded funds differ from mutual funds which are only traded once per day.

ETFs let you invest in a group of securities at once. They have lower fees than actively managed funds and can be traded more readily as well. However, before you invest in ETFs, it's important to look into how they align with your goals as an investor.

Gold ETFs are a way for investors to gain exposure to gold without owning the physical commodity itself. They allow investors to own quantities of gold-related assets, thereby diversifying their portfolio. While a number of Gold ETFs track the price of gold, others invest in companies that mine the precious metal.

Here's why you may consider going for gold.

Diversification: Gold typically doesn’t respond to external factors that normally impact stocks and other fixed income assets. As Gold ETFs closely track market prices of gold, they have similar resistance to volatility.

Purity: Gold ETFs are backed by gold of the highest purity – 99.5%.

No storage necessary: While every unit of a Gold ETF represents a gram of gold, there are no storage costs and reduced concerns about theft.

Liquidity: Gold ETFs can be traded on stock exchanges. This can make them highly liquid. 

There can be a downside to investing in Gold ETFs.

Limited trading time: On a stock exchange, Gold ETFs can only be traded on weekdays between 9:15am and 3:30pm.

Expense ratio: This is the fee added to the purchase cost by the fund.

Numerous products: The sheer number of Gold ETFs available makes picking the right fund challenging.

Counterparty risk: This is the probability that the other party in the transaction may not uphold their end of the deal or contract. As financial products, Gold ETFs can be affected by this risk. Physical gold avoids counterparty risk as it is a tangible asset.

A hedge instead of an investment: Gold ETFs also offer hedge against inflation and currency fluctuations.

Additional costs: While there aren't any logistical overheads associated with Gold ETFs, there are a few add-on costs. You will have to pay the expense ratio, a broker fee, and a commission for every trade.

Gold prices tend to be higher than Gold ETF prices. This is because physical gold needs to be purchased from a legitimate source, transported safely, and stored securely. If you purchase Gold ETFs, you can avoid all these additional costs and security risks. However, you will have to pay transaction fees when you purchase Gold ETFs. Whichever one you pick, remember to look into the various fees and associated costs before investing.

Gold ETFs are purchased through stockbrokers who use the funds you've invested to purchase gold bullion (gold that is officially recognized as being at least 99.5% pure and is in the form of bars or ingots). The pricing of Gold ETFs is based on current gold prices. As an investor, you should be aware of the NAV (Net Asset Value) of your Gold ETF. This is simply the sum of the assets in the fund minus any liabilities divided by the number of shares outstanding. For most Gold ETFs, the NAV can be accessed on a daily basis. Gold ETFs are subject to the same market risks as any other security.

Gold ETFs invest in gold-backed assets rather than the physical commodity.

Gold futures are contracts between buyers and sellers. The buyer makes a commitment to buy an amount of gold at an agreed upon price at a certain date. There are three main differences:
 

• Management fees: Gold ETFs can have management fees, while Gold Futures do not.
  
• Tax implications: Gold ETFs can have tax implications for long-term investors. With Gold Futures, the taxes are split between short-term and long-term capital gains. 
  
• Liquidity: Gold ETFs can be more liquid and cost effective. A number of funds now feature expense ratios as low as 0.17%. On the other hand, physical gold can be less liquid.
   

Despite their dissimilarities, both Gold ETFs and Gold Futures help investors achieve diversification.

While Gold ETFs invest in gold and Silver ETFs invest in silver, their differences go beyond their underlying assets.
 

• Long-term return: Silver ETFs can be more volatile than Gold ETFs. The long-term return on Silver ETFs can also be lower than the return on Gold ETFs.
  
• Expense ratio: Silver comes with greater storage costs as silver takes up much more space than gold for the same dollar value. Due to this, the expense ratio for Silver ETFs can be higher than for Gold ETFs.