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Investing in gold has become a hot topic lately. Readers might be wondering how to invest in gold. The good news is that you don’t have to dig it out of the ground or buy a gold brick from the Treasury. If you’re considering adding gold to your portfolio, you can easily buy a gold ETF.
An ETF is an investment security that trades like a stock. Unlike a stock that gets its value from the underlying business, an ETF holds many securities like stocks, bonds, or commodities like gold. Almost all ETFs attempt to mimic the returns of a specific asset class. For instance, a stock ETF may hold a portfolio of stocks to mimic the S&P 500 index. An EFT can also hold securities so that its price mimics the price of gold.
Gold ETFs can mimic gold in several different ways. One of the most popular ways a gold ETF works is to buy the physical gold itself. Investors in the ETF own a portion of the gold held by the ETF.
In addition to physical gold, ETFs can also invest money in gold derivatives. Gold derivatives include futures, options, or other gold derivatives. ETF managers invest in physical gold or derivatives so that the price of each ETF share moves in tandem with the price of gold.
A less common way to manage a gold ETF is to invest in the stocks of gold mining companies. Though this is probably the simplest way for an ETF to invest in gold, the ETF price might not track the price of gold as accurately as other forms.
There are several good reasons to be looking for gold ETFs to buy.
Why Buy Gold ETFs?
Investors have many reasons to be interested in gold ETFs to buy. First, gold has a defensive quality. Gold investments have been around for a long time. The price of gold has increased over time but has not fluctuated as much as stocks or bonds. Therefore, conservative investors may feel comfortable that gold will provide a smoother ride for their portfolios.
Some investors invest in gold to protect themselves from inflation. When inflation is high, a dollar doesn’t buy as many groceries or things from Amazon as it used to. The same concept applies to stock companies. During times of high inflation, stocks usually don’t perform very well.
At the same time, inflation can cause the price of gold to rise, just like other things. Investors may be able to take advantage by investing in gold as an alternative to stocks.
Some investors may also buy gold ETFs to diversify their investment portfolios. Because gold ETFs are usually steadier than stocks, they might be able to cancel out some of the swings in your overall portfolio. Similarly, if gold ETFs perform well when stocks fall, your overall portfolio may benefit from downside protection when stocks perform poorly.
ETFs are a convenient way to invest in commodities. Instead of locating, buying, storing and selling gold bricks or coins, a gold ETF can be easily purchased in your investment account. They trade continuously, so their ETF price can be viewed on your online account or finance app.
Readers should also be aware of how ETFs are taxed. If you buy an ETF and later sell it again, you owe taxes on the gain. You’ll pay a lower capital gains tax rate if you’ve held the ETF for over one year. On the other hand, if you take a loss on your ETF, you can write the loss off on your taxes. Please consult your tax advisor before investing.
As an added benefit, ETFs typically have a very low expense ratio. An expense ratio is a fee paid by the shareholder to the manager of the ETF. Mutual funds also have expense ratios but are usually higher than ETFs.
If you have a rich uncle willing to sell you some of his old gold coins, go right ahead. These gold ETFs might be a better option for the rest of us.
Gold ETFs to Buy Now
- iShares Gold Trust (NYSE: IAU): This gold ETF holds physical gold. Each ETF share is tied to a portion of the gold held by the ETF. iShares Gold Trust is managed by BlackRock, a widely respected index company. Readers can find additional information about the ETF on its fact sheet located on the BlackRock website.
- SPDR Gold Trust (NYSE: GLD): SPDR Gold Trust is one of the largest gold ETFs. State Street Global Advisors manages the ETF. Readers can find additional information about the ETF on its fact sheet located on its website.
- VanEck Vectors Gold Miners ETF (NYSE: GDX): This ETF seeks to track the Gold Miners Index, an index that tracks the overall performance of companies in the gold mining industry. GDX does this by holding the stocks of gold mining companies. Readers can find additional information about the ETF on its fact sheet located on its website.