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Where should you invest when inflation is high and the market is volatile? For many, the answer has long been there gold.
“Gold is generally considered a hedge against currency risk, and the headlines seem to be that currency risk in America is taking a serious turn,” says Thomas Maluck, a certified financial education instructor.
But how to invest in gold? If you’re not too keen on buying, holding and securing the metal, below we’ll look at how to invest in gold ETFs – and what gold investing experts have to say about them.
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What is a Gold ETF?
A Gold Exchange Traded Fund (ETF) is a type of investment security that provides investors with convenient electronic access to the gold market – eliminating the need to buy, hold or secure physical gold. The underlying assets of gold ETFs vary depending on the fund you choose, but asset management companies often buy and hold gold bullion (with 99.5% purity) and seek to track the intrinsic price of physical gold.
Alternatively, some will buy shares in companies involved in the production of gold, such as gold mining companies.
In both cases, gold ETFs can easily be traded like stocks on exchanges and will rise or fall in value depending on the performance of the underlying assets.
Who benefits from investing in gold ETFs?
Gold ETFs provide investors with a convenient way to access the gold market.
“One of the main advantages of investing in gold ETFs has to do with the relative liquidity and portability of ETFs. If you build a position in gold through an ETF and decide after a few months or years to close your position, you just sell the stock and move on,” says Small.
“Meanwhile with physical gold,” he adds, “you have to find a seller, maybe transport physical gold off your property, possibly pay a bullion dealer’s fee, provide a purity certificate for your gold, etc. .”
Aside from the convenience factor, gold ETFs are often considered safe-haven assets during geopolitical turmoil, economic uncertainty and inflation. “Gold is a great investment for those who want to preserve what they have and make their investments a little more stable,” says Patrick DiCesare, certified financial education instructor and owner of Basic Financial Literacy.
Learn more about your gold options with a free investment guide.
What are the disadvantages of a gold ETF?
While gold ETFs can be convenient and hedge against inflation, they fall short when it comes to returns.
Di Cesare says: “Those looking to grow their money should look at the overall stock market like the S&P 500. When we compare a gold ETF, OUNZ, and the S&P 500, the S&P 500 has gained 1.1% this year. When you discount five years, the S&P 500 is up 5%.”
It’s also important to understand the expense ratio to make sure you’re not losing too much in fees. “Keep in mind that gold trust ETFs sell small amounts of their gold over time to cover expenses, which generates taxable events for you if the ETF is held in a taxable account,” explains Small.
He adds: “Precious metals are also taxed at a higher capital gains rate, including a long-term rate of 28%, much higher than equity-based securities.”
How to invest in gold ETFs
You can invest in gold ETFs the same way you would buy other stocks and funds — using online brokerages, stockbrokers, robo-advisors, etc. However, not all gold ETFs will offer the same returns.
Be sure to consider factors such as underlying assets, performance over the past five years, net asset value, expense ratio, liquidity and tax implications. Most of these are available in each fund’s prospectus or on the ETF’s website in the SEC’s EDGAR database.
Learn more here now.
Other Gold Investment Alternatives You Should Know
If a gold ETF isn’t right for you, here are some gold investment alternatives to consider.
- Physical gold: Buying physical gold includes finding a trusted vendor, acquiring it, and keeping it safe.
- Gold futures: Gold futures are contracts between buyers and sellers on centralized exchanges on which investors bet the price of gold at some point in the future. They can be less liquid but have no management fees. In addition, taxes are split between long-term and short-term capital gains.
- Gold mutual funds: Gold mutual funds buy shares of companies in the gold mining industry. They may carry higher fees than ETFs and may require payment of a trading commission.
- Gold IRA: Gold IRAs are tax-advantaged retirement accounts that allow you to invest in gold with an eligible custodian. By going this route, you will be subject to IRA contribution limits and restrictions. Check out your gold IRA options here now.
Gold ETFs can be a convenient way to access the gold market, but they are not without costs and risks. It can be very helpful to have your gold investment plans run by a financial professional to ensure you fully understand advantages and disadvantages of your options.