Roger Wohlner is a writer and financial advisor with over 20 years of financial services experience. He writes about financial planning for Wealthsimple and for a number of financial advisors. His work has been published in Investopedia, Yahoo! Finance, The Motley Fool, Money.com, US News among other publications. Roger owns his own finance blog called 'The Chicago Financial Planner'. He holds an MBA from Marquette University and a Bachelor’s degree with an emphasis on finance from the University of Wisconsin-Oshkosh.
There are a number of gold funds and ETFs available in the marketplace. If this asset class interest you, and is appropriate for your asset allocation, make sure you understand exactly how it invests in this precious metal.
When investors think about investing in a mutual fund or ETF, they usually think of a portfolio of stocks or bonds that will hold a number of securities tied to the fund’s investment objective. For example, there are index ETFs, such as the Vanguard Total Stock ETF (VTI), that invest in a market-cap weighted portfolio of U.S. stocks that tracks an index that largely represents the U.S. stock market. But gold ETFs represent an investment in one thing: gold. The mechanics of the investment in gold will vary among these ETFs will vary a bit, but at the end of the day investing in a gold ETFs is about tracking the price movement of a single precious metal.Grow your money with low fees and no account minimums. Invest as little as a dollar and we’ll build you a personalized investment portfolio to meet your financial goals.
ETFs in this category take different paths to track the movement of gold. These include investments in gold mining shares, gold futures, and the use of leverage.
Investors should be aware that the IRS deems gold to be a collectible. This means that that long-term gains are taxed at 28% versus 15% or 20% for long-term gains on most stocks, ETFs, mutual funds, and similar investments. This may vary based on how the fund invests in or tracks the price of gold.
Why a gold ETF versus buying actual gold?
Owning gold can be a bit of a hassle for individual investors on several fronts:
You will need to find a reputable dealer to ensure that the gold you are buying is legitimate and of the quality that you are promised.
Gold will need to physically stored.
Gold dealers will charge a premium when you buy or sell bullion or gold coins.
If you are dealing in old or vintage gold coins, you will need to have the authenticity and quality of these coins verified by an expert.
GLD is the ticker for the SPDR Gold Trust ETF, the largest fund that invests directly in physical gold. SPDR ETFs are offered by State Street Global Advisors, the investment management are of State Street Corporation a major player in a number of areas in the investment arena, including administration and research.
The expense ratio of the ETF is listed as 0.40% by Morningstar.
The ETF tracks the spot price of gold, less fund and storage expenses, that’s held in a vault in London. The fund generally doesn’t sell any of this bullion unless there is a need to raise cash to meet client redemptions.
Like all ETFs, GLD is traded daily on the stock exchange. Due to the high volume of daily trades in the ETF, the bid/ask spread is relatively narrow. This is the spread between the listed price of the ETF and what a trader will actually pay for the shares if sold. Some lower volume stocks and ETFs may encounter a larger spread that can result in the seller receiving a lower price than expected when selling their shares.
Some other gold and gold-related ETFs to consider:
ishares Gold Trust (IAU)
A low-cost option, IAU is issued by Blackrock, the firm behind the ishares family of ETFs. IAU holds physical gold in vaults and storage facilities around the world.
VanEck Vectors Gold Miners ETF (GDX)
This ETF invests globally in firms engaged in various efforts related to the mining of gold and other precious metals. This has been a very popular ETF in the gold space, but it’s performance is not as closely tied to the performance of the metal as with IAU or GLD. Mining stocks will be impacted by the price of gold, up or down, but there are other factors at play here, including how profitably and efficiently these mining firms perform.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
GDXJ is similar in many ways to its “sibling” ETF GDX. The fund tracks a market-cap weighted index benchmark of firms engaged in the mining of gold and silver. The fund focuses on smaller cap holdings as compared to GDX.
Compared to GDX, GDXJ will tend to incur more market risk due to the lower market cap of most of its holdings, but GDXJ has been able to piggyback off of the success of GDX and maintains an excellent degree of liquidity and is widely traded.
Direxion Daily Gold Miners Index Bull 3X Shares (NUGT)
NUGT is a leverage ETF that seeks to replicate three times the daily performance of the NYSE Arca Gold Miners index. (Leverage ETFs offer the potential for outsized gains on a daily basis, but also for outsized losses as well.)
The index is composed of companies that engage in various aspects of mining for gold and silver. The fund contains both domestic and international holdings.
Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL)
SGOL’s expense ratio of 0.17% is very competitive, the fund’s trading volume offers investors a low bid/ask spread and good liquidity. This fund is not the equivalent of a direct investment in gold, but allows investors the ability to participate in the price movement of gold without the hassles and expenses of physical storage and related costs.
SPDR Gold MiniShares Trust (GLDM)
GLDM is in many ways similar to its sibling ETF, GLD. This ETF is much newer, having come into existence in June of 2018. The fund holds about 1/10 as much gold underlying each share as does GLD. The expense ratio of GLDM is among the cheapest of all ETFs in this space at 0.18%. This compares to 0.40% for its sibling GLD.
GraniteShares Gold Trust (BAR)
BAR invests directly in physical gold stored in vaults in London. The fund is structured as a grantor trust, meaning the trustees cannot loan out the gold. It also means that long-term capital gains will be taxed at the higher capital gains rate for collectibles.
The fund is very transparent, the issuer Granite Shares publishes a daily list of the physical gold held on its site.
Invesco DB Gold Fund (DGL)
DGL uses a bit of a unique strategy when compared with some of the other ETFs in this space. It tracks a benchmark index of gold futures contracts. In order to minimize contango, which is a situation where the futures price of a commodity is higher than the spot price for the actual commodity, the fund managers monitor the shape of the futures price curve.
Unlike some of the funds listed above, DGL holds no physical gold bullion. No matter how good the managers are at choosing the right futures contracts for the fund, it will not track the actual price movements of the physical commodity. The fees for the ETF are high at 0.78%.
VanEck Merk Gold ETF (OUNZ)
OUNZ tracks the spot price of gold, holding gold in vaults in London, which investors can access if they redeem their shares in exchange for coins and bars. (While this is a unique feature, high minimum fees make redeeming small holdings for physical gold impractical.)
The fund does a good job of tracking the spot price of gold and has reasonable expenses for this sector at 0.40%.
Diversification outside of gold
Investing in gold ETFs, whether via an ETF that tracks the spot price of the metal, one that tracks the shares of gold miners or via another method can be part of a diversified portfolio. It could be important for investors to look outside of gold too. A truly diversified portfolio not only invests in one commodity but multiple asset classes, industries and even markets. You you invest will depend on your goals, including their time horizon for the money and their tolerance for risk. A robo-advisor can help you determine what your overall asset allocation should be based upon your situation. You just take a short survey to determine your goals and risk tolerance before a personalized portfolio is built for you.Wealthsimple Invest is an automated way to grow your money like the world's most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
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