Gold exchange-traded funds (ETFs) are open-ended funds that are traded on a stock exchange much in the same way the shares of a company are traded. It allows you to trade and actively track the price of gold without actually storing or possessing any physical gold bullion. You’re basically buying gold holdings that are stored in a remote location on your behalf, and can be traded on the stock exchange during market hours; units of an ETF can be sold margined or short, similar to conventional stocks.
How Does a Gold ETF Work?
When you invest in an ETF you are actually investing in a set amount of gold. However, you cannot trade the ETF for gold, you can only exchange it for its cash value (which you could then turn around and buy gold bullion with if you wanted to). You can sell your ETF on the stock exchange whenever you think the conditions are right to provide an optimal return.
Choosing a Gold ETF
Finding the right ETF for your needs is not difficult at all, you just need to determine what matters the most to you. If you’re concerned about liquidity it would be best to go with the largest fund at the time. If you’re worried about where the physical gold that backs your ETF is stored, go with a Swiss ETF like ETFS Physical Swiss Gold. Alternatively you could check out the list of the top ten gold and precious metal ETFs for 2012.
Notable Benefits of a Gold ETF
Gold ETFs offer the following three benefits:
- No Delivery Charges or Premiums – When you buy physical gold bullion you have to pay a premium over the current spot price, and you have to pay a delivery/making charge. With a gold ETF you don’t have any of these additional expenses, and you don’t have to cover sales tax, VAT, or wealth tax.
- No Possibility of Theft – When you buy physical gold bullion and keep it in your possession there is always the possibility that it could be stolen. Although gold ETFs don’t give you access to physical gold at all, and many believe that a lot of funds don’t have enough gold to back their customers’ holdings, you can always exchange your ETF for cash, and it cannot be stolen.
- Ease of Liquidation – As long as there is a stock exchange it will be easy to convert a gold ETF into cash. On the other hand, finding a dealer to buy your gold coins or bars is not always easy, as many banks won’t buy them back and many jewellers will only trade something of equal value instead of paying cash.
