Kent Thune
·7 min read
In a world where financial markets are constantlyevolving and investors seek diversified avenues to safeguard their portfolios, gold ETFs have become prominent instruments offering exposure to the timeless allure of the precious metal. These investment vehicles have garnered increased attention in recent times, reflecting the relevance of gold as a safe-haven asset and diversification tool.
Whether you are a seasoned investor or just stepping into the world of commodities, understanding the dynamics of the best gold ETFs can be a valuable compass in navigating the uncertainties of financial markets.
What Is a Gold ETF?
A gold ETF is a type of exchange-traded fund that aims to track the price of gold. Gold ETFs are designed to provide investors with exposure to the price movements of gold without the need to physically buy, store and manage the precious metal itself. Instead, investors can buy and sell shares of a gold ETF on a stock exchange, similar to trading shares of a company.
The largest gold ETF on the market is the SPDR Gold Trust (GLD) with assets under management of $55.18 billion as of Nov. 14, 2023. Launched in 2004, GLD is also the oldest gold ETF on the market.
Types of Gold ETFs
There are several types of gold ETFs that cater to different investor preferences and strategies. The main types of gold ETFs include:
Physical gold ETFs: These ETFs directly hold physical gold bullion as their underlying asset. Each share of the ETF represents fractional ownership of a specific quantity of gold held in a secure vault. Physical gold ETFs aim to closely track the price of gold.
Futures-based gold ETFs: Instead of holding physical gold, these ETFs use financial derivatives such as futures contracts and swaps to replicate the performance of the gold price. While these ETFs don't own actual gold, they are designed to deliver returns that closely mimic the movements in the gold market.
Leveraged and inverse gold ETFs: Leveraged gold ETFs use financial derivatives to magnify the returns of the underlying gold index. For example, a two-timesleveraged gold ETF seeks to provide double the daily return of gold prices. Inverse gold ETFs, also known as short gold ETFs, aim to deliver the opposite performance of the gold market, profiting when the price of gold declines.
Gold miner ETFs: Instead of directly tracking the price of gold, gold miner ETFs invest in the stocks of gold mining companies. These ETFs provide exposure to the performance of gold mining stocks and are influenced by factors such as mining costs, production levels and the financial health of mining companies.
Income-generating gold ETFs: These ETFs may employ covered call strategies or other options strategies to generate income for investors. They are designed for investors seeking both exposure to gold and income from their investment.
Best Gold ETFs by 2023 Performance
Ticker | Fund | AUM | Expense Ratio | YTD Gain |
$3.98M | 0.38% | 6.99% | ||
$5.98B | 0.10% | 6.74% | ||
$933.33M | 0.09% | 6.70% | ||
$548.58M | 0.18% | 6.69% | ||
$939.49M | 0.17% | 6.65% |
YTD price gain and other data as of Nov. 13. 2023. Leveraged and inverse ETFs weren’t considered.
How to Invest in a Gold ETF
Like other exchange-traded funds, gold ETFs can be bought and sold through brokerage platforms, such as Charles Schwab, Fidelity, Vanguard and Robinhood. Here are the general steps to buy gold ETFs:
Open a brokerage account: If you don't already have a brokerage account, you'll need to open one with a reputable brokerage firm. Many online brokers offer a range of investment options, including ETFs.
Research gold ETFs: Conduct research to identify the specific gold ETF that aligns with your investment goals. Consider factors such as the expense ratio, tracking methodology and any unique features offered by the ETF. You can use the etf.com screener to find gold ETFs.
Deposit funds: Fund your brokerage account by depositing money through methods accepted by the brokerage, such as bank transfers or other funding options.
Access the trading platform: Log in to the brokerage's trading platform or website using your account credentials.
Place an order: Once you've identified the desired gold ETF, place an order to buy the number of shares that you specify. The most common type of order is a market order, which is an order to buy or sell a stock or other asset at the current market price.
Confirm the order: Confirm the details of your buy order, including the quantity and price, before submitting the order. Some brokerages may require additional verification steps.
Monitor your investment: After your order is executed, you can monitor your investment by accessing your brokerage account. Track the performance of the gold ETF and stay informed about any market developments that may affect its price.
Sell or hold: When you decide to sell your investment, you can place a sell order through the brokerage platform. Alternatively, you may choose to hold the investment for the long term.
Consider tax implications: Be aware of the potential tax implications when selling your gold ETF, especially when trading in a taxable non-individual retirement account. Capital gains on gold investments are typically taxed at higher rates than traditional investments like stocks.
Before choosing a brokerage, consider factors such as trading fees, account features and the range of available investment products. Additionally, read user reviews and check for any account maintenance fees or other charges associated with the brokerage. It's advisable to select a brokerage that aligns with your preferences and offers a user-friendly platform for your investment activities.
Gold Outlook for 2023 and 2024
The outlook for the price of gold in 2024 is mixed, as multiple factors could push the value of the precious metal in any direction. For example, gold’s perceived value as a safe-haven asset during times of uncertainty could push the price of gold bullion higher if global turmoil continues to accelerate. A stronger U.S. dollar, however, could weaken demand for gold in 2024.
Factors potentially supporting the price of gold are:
Inflation: Although gold’s relation to inflation weakened after the 1970s, gold is still widely perceived as an inflation hedge, because its value tends to rise when the purchasing power of money falls.
Geopolitical uncertainty: The world is facing geopolitical tensions, such as the Hamas-Israeli war, the war in Ukraine and the growing rivalry between the United States and China. Increased tensions could create greater safe-haven demand for gold, which could push prices higher.
Central bank policies: If inflation remains a problem in 2024, central banks around the world will continue to tighten monetary policy, which could also support gold prices. That is because higher interest rates can make it more expensive to hold bonds, which can lead investors to seek out alternative assets such as gold.
Weaker U.S. dollar: Gold and the U.S. dollar often exhibit an inverse relationship. When the U.S. dollar weakens, the price of gold in U.S. dollars typically rises, and vice versa. This inverse correlation is not always perfect, but it is a widely observed trend in financial markets.
However, there are also some risks that could weigh on gold prices in 2024, including:
A stronger U.S. dollar: A stronger U.S. dollar could make gold less attractive to investors, becauseit would make it more expensive to buy for foreign investors.
Easing geopolitical tensions: 2023 is coming to an end with significant tensions in the Middle East and in Eastern Europe, but less geopolitical uncertainty in 2024 could reduce gold’s safe-haven status.
A decrease in demand: If the global economy continues to grow, demand for gold as a safe-haven asset could decline. Investors may also prefer other safe-haven assets, such as Treasuries, instead of gold.
Increased supply: Increased supply of gold from mines could also put downward pressure on prices, especially if demand does not increase.
Bottom Line on Investing in a Gold ETF
Investors should carefully consider their investment objectives, risk tolerance and the specific features of each type of gold ETF before making investment decisions. Different gold ETFs come with varying risk profiles, expense ratios and potential returns. Reading the prospectus and understanding the methodology of how each ETF tracks the gold market is crucial for making informed investment choices.
