Today’s investing landscape looks very different compared to investments even just ten or twenty years ago. Investors today have more options to diversify and decrease risk while also holding traditional assets. Gold ETFs are one of these options that investors may want to consider.
What Are Gold ETFs?
Gold has traditionally been considered a safe, long-term method to store value. However, owning physical gold is usually impractical and cumbersome. Gold ETFs allow investors to invest in gold without actually having physical gold in their possession.
Gold ETFs also hold assets related to gold, which allows for additional diversification compared to simply owning gold outright. These ETFs do not necessarily track the price of gold in lockstep, but they are related.
How Gold ETFs Work
Gold ETFs hold gold derivative contracts. They are often backed by gold, but by owning a gold ETF, an investor does not actually own any physical gold. Instead, gold ETFs track or reflect the price of gold. As a result, they can be a good asset to hedge against fluctuations in the economic or political landscape. Because gold is relatively stable, it generally performs better as a hedge against risk instead of an investment that will gain substantial value over time.
Some gold ETFs are a reflection of other aspects of the gold industry as a whole. For example, some options are more specific to gold mining or general precious metals. These ETFs can be purchased through a broker or fund manager, just like an investor would purchase any other stock.
Types of Gold ETFs
Within the larger umbrella of gold ETFs are three types of gold ETFs. Each has its own benefits and drawbacks.
- Physical Gold ETFs Many gold ETFs are physically backed by gold. That means someone owns the gold (in gold bullion bars and coins), and the investors pay for a piece of that ownership. These ETFs generally have low returns, but they offer a safe hedge against the economy.
- Synthetic Gold ETFs Synthetic Gold ETFs provide derivatives and financial products based on derivatives. These investments technically are not backed directly dollar-for-dollar by gold products. Instead, these are commonly made up of gold futures, allowing investors to invest in gold futures in a more streamlined and efficient way.
- Leveraged Gold ETFs A leveraged gold ETF uses futures contracts to increase the overall impact of fluctuations in the gold market. Because leverage (debt) is involved, both the gains and the losses are magnified. This investment tool is riskier, but it can bring higher returns.
Market Trends and Performance of Gold ETFs
Overall, investments in Gold ETFs were weak during 2022, but it was still up from 2021. The holdings for Gold ETFs declined by about 3% during 2022. Nonetheless, gold remains one of the most popular ETFs in the world because of its hedging properties and overall stability. Gold ETFs often move in sync with the price of gold.
Factors to Consider When Investing in Gold ETFs
Before deciding whether to invest in gold ETFs, be sure to consider the following:
- Expenses and fees related to maintaining and holding the ETF (expense ratios)
- The type of gold ETF that fits your investing strategy
- Past performance (especially compared to gold itself)
- Whether leveraged ETFs, which are higher risk, are the right option for your personal risk tolerance
Overall, doing your research before purchasing any type of investment is a good idea. When used properly, gold ETFs can be a good way to decrease risk in the event of political turmoil or economic downturn.