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Summary
Gold ETFs allow investors to gain exposure to gold without buying or storing physical gold. They trade on stock exchanges like stocks, can help diversify a portfolio, and are often used as a hedge against inflation or market volatility. However, like any investment, Gold ETFs come with risks, fees, and tax considerations investors should understand before buying.
Traditionally, gold has been viewed as a safe long-term store of value. In fact, there was a time when it served as the currency of kings. But did you know that there's a way to invest in gold without actually owning the physical product? Gold ETFs can make this possible.
What are ETFs?
ETFs, or exchange-traded funds, are investment funds that trade on stock exchanges like stocks. They allow investors to buy a diversified basket of investments through a single purchase and are often known for their lower fees and flexibility compared to some mutual funds.
What are Gold ETFs?
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.
Gold ETFs in Human Terms
Think of a Gold ETF as a way to invest in gold without needing to buy gold bars or coins yourself. Instead of storing physical gold, you buy shares of a fund that tracks the price of gold or invests in gold-related companies.
Advantages of Gold ETFs
Here's why you may consider going for gold.
Diversification: Gold often reacts differently than stocks and some other asset classes during periods of economic uncertainty. As Gold ETFs closely track market prices of gold, they have similar resistance to volatility.
Purity: Some Gold ETFs are backed by physical gold bullion that meets industry purity standards.
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.
TAKE NOTE
Gold ETFs may help diversify a portfolio, but they can still fluctuate in value and are not guaranteed to protect against losses during market downturns.
Disadvantages of Gold ETFs
There can be a downside to investing in Gold ETFs.
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: Some investors use Gold ETFs as a hedge against inflation or currency fluctuations rather than purely for long-term growth potential.
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 ETFs vs Physical Gold
Investors often compare Gold ETFs with owning physical gold directly. Here are some key differences to consider:
Gold ETFs | Physical Gold |
Bought and sold on exchanges | Purchased from dealers |
No storage required | Requires secure storage |
Harder to buy and sell | |
Management fees may apply | Storage and insurance costs may |
Valued based on fund underlying | Valued based on commodity price of |
The right option depends on an investor’s goals, costs, and preference for convenience versus direct ownership.
How do Gold ETFs work?
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. Investors can buy and sell Gold ETFs through online brokerage accounts, including self-directed investing platforms like TD Direct Investing.
Considering investing in Gold ETFs?
To find an ETF suited to your needs, it may be a good idea to consider the following factors:
- Five-year returns: Most Gold ETFs aim to track the price of gold, but returns may vary due to factors such as fees, fund structure, and market conditions. It can be beneficial to check gold prices over the last 5 years.
- Expense ratio: This annual fee is deducted from your investment in the fund. According to ETF.com, the average expense ratio for Gold ETFs is 0.65%. A lower ratio is beneficial, especially if you're just getting started with Gold ETFs.
There are also a few other things to watch out for:
- Leveraged ETFs: Seek to amplify exposure to short-term price movements. These can be highly complex and carry significant risk, including the potential for amplified losses over short periods as they use financial derivatives and borrowed money.
- Gold exchange-traded notes: ETNs are secured debt obligations. They don't actually own the underlying gold and present a greater risk of credit default.
Both Leveraged Gold ETFs and ETNs are geared towards seasoned, active traders.
To learn more about identifying the right ETFs using screener tools, check out How to select the best ETFs for your needs.
After you've done your research and weighed your options, you're ready to buy Gold ETFs. The process is straightforward and should be familiar if you've ever purchased stocks through an online broker. If you do not currently have an account with a broker, you can open a TD Direct Investing account, here.
Gold ETFs vs. Gold Futures
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.
Gold ETFs vs. Silver ETFs
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.
Frequently Asked Questions
Are Gold ETFs backed by real gold?
Some Gold ETFs hold physical gold bullion, while others invest in gold-related companies or derivatives. Investors should review a fund’s objectives and holdings before investing.
Do Gold ETFs pay dividends?
Most Gold ETFs do not pay dividends because gold itself does not generate income. However, some gold mining ETFs may distribute dividends.
Are Gold ETFs safer than buying physical gold?
Gold ETFs can eliminate storage and security concerns associated with physical gold, but they still carry market risk and may fluctuate in value.
Can you hold Gold ETFs in a TFSA or RRSP?
Many Gold ETFs can be held inside registered accounts like TFSAs and RRSPs, depending on the specific fund.
What affects Gold ETF prices?
Gold ETF prices are often influenced by the market price of gold, interest rates, inflation expectations, currency movements, and investor demand.
How are Gold ETFs taxed?
When it comes to taxation, most ETFs are treated like mutual funds. At the same time, they can be more tax efficient than actively managed funds. This is simply because ETFs tend to have less portfolio turnover which can minimize capital gains distributions. This can help improve long-term after-tax performance and tax efficiency.
Conclusion
Gold ETFs can offer investors a more convenient way to gain exposure to gold without the challenges of buying, transporting, or storing physical bullion. While they may help diversify a portfolio and hedge against market uncertainty, investors should still consider fees, risks, and their overall investment goals before buying. For self-directed investors interested in researching and purchasing ETFs, platforms like TD Direct Investing can provide access to a wide range of investment tools and products.
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