Exchange-traded funds, which are more commonly known as ETFs are a type of marketable security that is tracked on a stock index, through an active commodity, bond, or some basket of assets. There are many different types of ETF, based on what is being traded. Different nations might also host different fund options.
Some of the most popular exchange-traded funds include SPY – SPDR S&P 500 ETF, VOO – Vanguard S&P 500 ETF, QQQ – PowerShares QQQ ETF, GLD – SPDR Gold Shares ETF, EEM – iShares MSCI Emerging Markets ETF, IEMG – iShares Core MSCI Emerging Markets ETF, VTI – Vanguard Total Stock Market ETF and IVV – iShares Core S&P 500 ETF.
Mutual funds differ from ETF’s due to the fact that the shares can be traded just as if they were a common stock on a stock exchange. In the case of a gold ETF, the commodity ETF only consists of a single principal asset in gold. In this way, Exchange-traded funds act like individual stocks, and they trade on a specific ETF exchange in much the same way.
At the same time, it’s important to keep in mind that the fund itself directly holds the gold derivative contracts that are backed by physical gold. This means that if you invest in a gold ETF, you won’t technically own any physical gold. If you redeem the gold ETF weeks, months, or even years down the line, you will not receive the physical precious metal in any form. You will be treated as an investor and thus will receive the cash equivalent of the amount of gold your ETF was for.
What Is The Investment Principle Behind A Gold ETF?
Taken in a certain light, investors use things like gold ETFs to track as well as reflect the price of an ounce of gold. While the assets in the exchange-traded funds are indeed backed by the commodity in questions, the overarching intention is not for an individual investor to physically own gold. What a gold ETF is designed to do is to give the individual investor an opportunity to gain exposure to the overall performance of gold and it’s market price movements.
How Do I Use A Gold ETF?
A Gold ETFs offers many of the same defensive asset traits that you find with bonds. This encourages many savvy investors to use them to help hedge against economic disruptions and political issues that affect stock markets around the world. At the same time, it is also used for currency debasement.
Historically gold tends to rise any time the dollar is weak or showing signs of being rapidly devalued. This means that if your investment portfolio holds an asset that has risk exposure to the dollar’s downside, investing in a gold ETF can help you hedge that potentially volatile exposure. On the other end of the spectrum selling a gold, ETF can also act as a hedge if your investment portfolio has exposure to the potential upside.
A gold ETF is essentially a commodity exchange-traded fund which can be used to help hedge gold commodity risk while also helping you to gain exposure to the kind of fluctuations gold experiences around the globe. Should an investor have increased risk in their portfolio assets at a time when the price of gold is on the rise, then owning a gold ETF can further serve to reduce risk in that position.
Are There Other Areas Of Exposure That Come With A Gold ETF?
Even though gold itself is a commodity-based ETC, there are also some gold industry ETF’s as well. If you wanted to invest to gain exposure to the gold mining industry, owning a gold ETF can also be an investment strategy that can fit that type of portfolio strategy.
While there are indeed specific gold-mining stocks and even various precious metals indexes a gold ETF may be a simpler method for investing in the overall production of the mold mining industry while also gaining a more diversified portfolio. The benefits of this type of ETF strategy includes hedge protection, which makes them a useful tool to have in your portfolio.
A Gold ETF can also be employed as a hedge against regional risk while also gaining a little more foreign exposure. If, for example, a certain country depends largely on gold, gold mining, or other aspects of the gold industry as a primary source of income, you as an investor with portfolio asset could sell, or short a gold ETF as a type of protection. This means that if gold does drop significantly, the short ETF position can help lessen your total investment loss.
What Are The Disadvantages Of Investing In A Gold ETF
Technically, when you invest in a gold ETF, you do not physically own any actual gold, and you can’t take it as a form of payment, should you choose to liquidate your ETF. So, it’s not an effective vehicle for owning physical gold, if you say wanted to actually possess a gold bar, gold bullion, or something type of gold coins. A gold ETF is essentially a gold contract, where the derivatives and can only be redeemed for cash, not physical gold in any form.
When it comes to taxes a gold ETF may be at a disadvantage, depending on where you live. In some states gold ETFs do not have the same tax breaks on capital gains that a lot of other tradition exchange-traded funds enjoy. So before you dive into gold ETFs, make sure you do a little research on how it will affect your tax return.
What Are Some Of The More Popular Gold ETFs?
There is a variety of gold ETF to research. Yet before you commit to including them in your investment strategy you should take the time to take a closer look at the trends in some of the more popular funds. Think about how the move, while considering whether or not it will work for your portfolio needs. Some of the more popular gold ETF’s to watch include the GLD – SPDR Gold Trust ETF, the IAU – iShares COMEX Gold Trust ETF, and the DGL – PowerShares DB Gold ETF
Once you get a feel for how they move and how the gold industry is affected, you can make a more informed decision on whether or not gold is right for you and your portfolio. It can also help to seek out the services of an investment advisor who specializes in gold investments, including gold ETFs.