Gold Exchange Traded Fund or gold ETF has been gaining popularity in recent years as investors look for alternative investment options to diversify their portfolios. In this blog post, we will discuss what Gold ETFs are, their advantages and disadvantages, the different types of Gold ETFs, and reasons why you should consider investing in them.
What is gold ETF?
An ETF is a type of investment fund that is traded on stock exchanges, just like individual stocks. Gold ETFs are a specific type of ETF that invests in gold. They provide investors with exposure to gold by investing in derivatives without having to physically hold the metal.
How do gold ETFs work?
Gold ETFs hold physical gold or invest in gold derivatives, and the value of the ETF is tied to the price of gold. As the price of gold changes, so does the value of the ETF. Investors can buy and sell shares of the ETF on the stock exchange, just like a stock.
Gold ETFs can be either physical or synthetic. Physical Gold ETFs hold physical gold bullion as the underlying asset, while Synthetic Gold ETFs use derivatives to track the price of gold. Gold ETFs trade on stock exchanges just like stocks, with the Gold ETF share price reflecting the price of gold.
What are the advantages and disadvantages of Gold ETFs?
Advantages of investing in gold ETFs
- Gold ETFs offer an easy way to invest in gold without owning physical gold.
- Gold ETFs are more liquid than physical gold and can be bought and sold easily on the stock exchange.
- Gold ETFs provide portfolio diversification and can be used as a hedge against inflation.
- Gold ETFs are low-cost compared to other types of gold investments.
Disadvantages of investing in gold ETFs
- Gold ETFs do not offer the same level of security as physical gold, as there is a counterparty risk involved.
- Gold ETFs may not perform as well as physical gold during times of economic uncertainty or geopolitical instability.
What are the types of gold ETFs?
1. Physical Gold ETFs
Physical Gold ETFs hold actual gold bullion as their underlying asset. The ETF is backed by physical gold held in a vault, and the shares of the ETF represent a portion of the gold held.
Benefits of Physical Gold ETFs
- Physical Gold ETFs offer a high level of security as they hold actual gold bullion.
- Physical Gold ETFs offer a simple way to invest in physical gold without having to store it yourself.
- Physical Gold ETFs are a cost-effective way to invest in physical gold.
Risks of Physical Gold ETFs
- There is a risk of loss due to theft or damage to the gold held in the vault.
- Physical Gold ETFs have a counterparty risk as they rely on a custodian to store the gold.
2. Synthetic Gold ETFs
Synthetic Gold ETFs invest in gold derivatives, such as futures and options, instead of physical gold bullion. The ETF tracks the price of gold through these derivatives.
Benefits of Synthetic Gold ETFs
- Synthetic Gold ETFs offer more flexibility than Physical Gold ETFs, as they can invest in a wider range of gold derivatives.
- Synthetic Gold ETFs are less expensive than Physical Gold ETFs, as they do not have to store actual gold bullion.
Risks of Synthetic Gold ETFs
- Synthetic Gold ETFs have counterparty risk as they rely on the issuer to deliver on the gold derivative contracts.
- Synthetic Gold ETFs may not track the price of gold as closely as Physical Gold ETFs.
Why invest in gold ETFs?
- Portfolio Diversification: Gold ETFs are a great way to diversify your investment portfolio as they offer exposure to the price of gold, which has a low correlation with other asset classes. By adding gold ETFs to your portfolio, you can reduce the risk of your portfolio and achieve more stable returns.
- Hedging Against Inflation: Gold is often considered a hedge against inflation as its price tends to rise during inflationary periods. Investing in gold ETFs can help protect your investments from the negative effects of inflation.
- Gold is a Safe-Haven Asset: Gold is a safe-haven asset that investors flock to during times of economic uncertainty. As a result, investing in gold ETFs can provide a cushion against market volatility and offer a sense of security to investors.
- Gold ETFs are Liquid Assets: Gold ETFs are highly liquid assets that can be bought and sold easily through a broker. This makes it easy for investors to buy and sell gold ETFs whenever they want without having to worry about the logistics of owning physical gold.
How to Invest in gold ETFs?
- Choosing the Right Gold ETF: There are several gold ETFs available in the market, including Gold Bees and Gold BeES, among others. When choosing a gold ETF, investors should consider the expense ratio, liquidity, and tracking error of the fund. It is essential to do thorough research before investing in any gold ETF.
- Buying Gold ETFs: Investors can buy gold ETFs through a brokerage account. Investors should ensure that their brokerage account is authorized to trade in ETFs. To buy gold ETFs, investors need to place an order with their broker, and the gold shares will be added to their brokerage account.
Investing in gold ETFs via smallcase
You can also invest in a basket consisting of gold ETFs via smallcase. Simply go to smallcase.com or the smallcase app, and login via your phone number. Then, go to ‘Discover‘ and enter ‘gold etf‘ in the search bar and hit enter. You’ll find an array of stock portfolios that have gold ETFs as a constituent. You can filter the choices based on minimum investment amount, volatility, or the theme of the smallcase. Just pick the one that fits your investment criterion.
Make sure that you do your diligent research before picking the right stock, keeping in mind your long-term investment goals and risk appetite.
Tax Implications of Gold ETFs
Investors should be aware of the tax implications of investing in gold ETFs. Gold ETFs are taxed as capital gains, and the tax rate depends on how long an investor holds the shares. Short-term gains (investments held for less than a year) are taxed as ordinary income, while long-term gains (investments held for more than a year) are taxed at a lower rate.
Gold ETFs investments are a great way to add diversity to your investment portfolio, hedge against inflation, and protect your investments from market volatility. However, investors should do their research and be aware of the tax implications of investing in gold ETFs.
If you’re looking to invest in gold ETFs, it’s important to choose the right fund and have a solid understanding of the investment.