What is the best way to invest in gold ETFs?
Gold has been seen as a valuable precious metal for centuries. But investors also see gold as interesting. For example, the gold price has risen steadily in recent years and gold is seen as a ‘safe haven’. Perhaps you would also like to invest in gold , but you do not know where to start. Many people do not want to buy physical gold because of the disadvantages: storage and insurance. One way to still profit from the raw material without having it physically in possession is via a gold ETF . In this article you can read more about the gold ETF.
What is a gold ETF?
An ETF is a so-called Exchange Traded Fund . This allows you to invest in broader groups of companies, for example based on geography or market sector. An ETF can focus specifically on a country such as China, or the underlying value of a commodity, such as oil, coffee and of course gold.
But why would you want to invest in gold? The reasoning behind this is quite simple. Many investors see gold as a stable and stable investment. Especially in times of recession, when the stock markets are under pressure, gold is something that actually increases in value. Even with high inflation, an investor can protect his assets by investing in gold, silver, platinum or other precious metals. Read more about investing during inflation .
The advantage of an ETF is that you can invest in a gold market without purchasing the physical material itself. An ETF follows the price of gold. They do this by investing in a broad basket of companies that are active in the gold sector. You can simply buy an ETF through a bank with an investment platform or an online broker. Just like ”normal” shares, ETFs can be traded. You then own a piece of the fund. Only this fund follows the underlying value of gold. Via CompareAllBrokers.com you can compare online brokers with each other and see who offers the best conditions for investing in gold ETFs.
What to look for in gold ETFs?
Those who would like to invest in gold ETFs should take a few things into account. Below you can read the most important ones.
Underlying value of the ETF
An Exchange Traded Fund invests in a basket of companies. In the case of a gold ETF, these could be companies that mine gold, trade precious metals such as gold, or invest specifically in the physical material or track gold futures. These are all different ways to track the gold price, and therefore also have different performances. For example, the price of companies that mine gold is not only dependent on the price of gold itself, but also on fuel and labor costs. Take this into account when choosing and decide for yourself what you would most like to invest in.
Size matters
In the case of an ETF, the size of the fund is indeed important. An advantage of a large fund is that the costs are usually lower. Because they have a larger asset under management, these ETFs also have a higher liquidity, and the difference in the purchase and sale price is also smaller. The traded volume is therefore often larger, which is nice if you want to sell your ETF again.
Leverage
ETFs come in all shapes and sizes. Most ETFs only try to track an index as closely as possible. For example, gold. If the index rises by 10 percent, the ETF wants to rise 10 percent. However, some ETFs use so-called leverage. These ETFs are also called ”leveraged ETFs” and do not only want to track the index, but also achieve twice or even three times the return of the underlying value. However, this is only possible by using debt and/or financial derivatives , and the risk is correspondingly higher. You can indeed make a significant profit with an ETF with leverage. But beware: the same applies to a loss. Then your investment will deteriorate two or three times as fast.
Currency differences
You may have seen it on a stock exchange or online broker: some shares and ETFs are traded in euros and dollars, others in British pounds or Danish kroner. The price of physical gold is usually expressed in dollars, which makes the dollar exchange rate important, especially if your ETF is expressed in euros or British pounds. Currency differences can therefore also affect the return of an ETF. The currency in which an ETF is expressed can also be important in terms of regulations. To use a simple example: the Turkish currency is currently worth very little, as is the Russian Ruble. However, if you as a company trade in these currencies, buying gold is very expensive, because the exchange rate of your currency is very low against the dollar. The same can apply to euros or British pounds. This can cause currency risk when investing .
Why should you invest in gold ETFs?
Investing in gold is probably the oldest investment strategy in the world. But why?
A safe investment
Our current currencies are based on trust. A euro coin or a 10 dollar note has no intrinsic value. We pay an amount for it because we trust that we can buy something with it, but the material itself is worthless. This is not the case with gold. Here the value of the gold coin or bar is directly linked to the material it is made of.
In times of crisis, this is an attractive feature. Gold is less affected by inflation. People therefore often invest in gold to protect the value of their assets. When the economy improves after a while, they can convert it back into “normal” currency. This way, you can weather the fierce storms that sometimes rage on the stock market.
Supply and demand
Another advantage of gold is the structurally high demand. Because central banks worldwide hold gold to support the regular currencies, there is always demand from these institutions. But companies and individuals also invest a lot in gold. The high demand is one of the reasons why the value of gold remains relatively stable.
Physical gold or a gold ETF?
Buying physical gold is actually the old-fashioned way to invest in gold. At the same time, there is a risk. By investing in the physical material yourself, you will also have to provide storage, security and possibly even transport. This involves costs and risks.
The gold ETF does not have that risk. After all, you only invest in a tracker, which can keep track of the good price in various ways. In this way, you link your money to the gold price, but without purchasing the physical material itself. Another advantage is that you can also sell gold ETFs quickly. With physical gold, this is a lot more difficult.
What kind of gold ETFs are there?
Of course, not every gold ETF is the same. For example, you can choose from trackers that have purchased physical gold themselves, or ETFs that focus on gold futures or shares in companies that are active in the gold world.
The Physical Gold ETF
These trackers have literally bought gold, which is stored in a vault. Every day the amount of gold is checked and compared to the current price of gold. This allows investors to see exactly what the value of the tracker is at that moment.
What about gold futures?
Here we come to a part of the investment market that is less well-known. A future (actually a forward contract) is an agreement in which one party commits to buy/have something delivered at a pre-agreed price. Gold ETFs that focus on so-called ”gold futures” buy contracts that oblige them to buy gold in the future at a certain price. However, before the future expires, the contract is sold on to another party. In this way, the ETF invests indirectly in gold, without purchasing the material directly. After all, the price of the future is linked to the price of gold. However, the difference in price between the old futures contract and the new one that is sold on can have an impact on the return. This indirect way of investing in gold is no longer very popular.
ETF on gold mining stocks
Finally, there are ETFs that buy shares in gold mining companies. The advantage of this method is that you as an investor can also profit from the price of these companies themselves. However, this also has disadvantages. Companies are not only dependent on the bare price of gold itself, but also on fuel, labor, machinery, and other investments. If one of these units is scarce, this will affect the profit margin of the company. And therefore also the price of the ETF. The gold price must then be considerably higher to compensate for these setbacks.
Keep comparing
At the end of the day, you have to decide for yourself which ETF suits you best. Comparing is crucial. Take the time to calmly compare the different brokers and the ETFs via sites such as Compareallbrokers.com. That way, you will save a lot of money in the long run and you will know for sure that your ETF fits best with your ideal investment strategy.
Our reading tips
for the novice investor