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There are various avenues for gaining exposure to gold, ranging from direct purchase of gold bullion to indirect methods such as owning shares in public mining companies. While some funds directly invest in physical gold, others manage a portfolio of gold-related stocks.
For retail investors looking to get involved, the most effective approach is through exchange-traded funds (ETFs) with gold as their underlying asset. ETFs offer convenience by providing instant diversification at a low cost. Here is an overview of some of the most widely held gold ETFs.
Top gold ETFs
Our top fund selections were based on the following criteria:
- U.S. funds listed in ETF.com’s screener for gold or materials ETFs
- Assets under management of at least $800 million
- Expense ratios below 0.60 percent
(ETF performance data mentioned below is as of July 18, 2024.)
SPDR Gold Shares (GLD)
GLD is among the most popular ETFs available. The fund invests in physical gold, with its performance closely tied to gold spot prices.
- 2024 YTD performance: 19.4 percent
- Five-year annual return: 10.1 percent
- Expense ratio: 0.40 percent
iShares Gold Trust (IAU)
Another popular choice, this fund also tracks the spot price of gold by investing in gold bars stored in vaults worldwide. It boasts a lower expense ratio compared to GLD.
- 2024 YTD performance: 19.5 percent
- Five-year annual return: 10.3 percent
- Expense ratio: 0.25 percent
VanEck Gold Miners ETF (GDX)
GDX is a top ETF in the global mining sector. The fund holds major names in the mining industry, with some companies also involved in mining silver and copper in addition to gold.
- 2024 YTD performance: 24.0 percent
- Five-year annual return: 8.6 percent
- Expense ratio: 0.51 percent
VanEck Junior Gold Miners ETF (GDXJ)
This fund focuses on foreign small-cap mining companies that derive at least 50 percent of their revenue from gold and silver. Approximately half of these companies are based in Canada.
- 2024 YTD performance: 11.1 percent
- Five-year annual return: 4.9 percent
- Expense ratio: 0.52 percent
GraniteShares Gold Trust (BAR)
This ETF directly invests in gold stored in a London vault overseen by ICBC Standard Bank, with its price closely tracking the spot price of the precious metal.
- 2024 YTD performance: 19.0 percent
- Five-year annual return: 11.1 percent
- Expense ratio: 0.175 percent
Why invest in gold
Investors may view gold as an appealing investment for various reasons:
- Diversification: Retail investors often purchase gold ETFs for diversification, reducing the risk of overexposure to a single asset.
- Lower correlation with the stock market: Historically, gold has shown a low correlation with the stock market, smoothing out portfolio returns. For instance, during the 2008 financial crisis, gold prices rose by 2 percent while the S&P 500 index plummeted by 37 percent. More recently, gold prices surged following the collapse of Silicon Valley Bank.
- Hedge against inflation: Gold can serve as a hedge against inflation, as it has performed well during periods of high inflation in the past, notably in the 1970s. However, there is no guarantee that gold will rise alongside inflation over time.
- Safe haven asset and store of value: In times of political or social unrest, investors often turn to gold as a safe haven, shifting away from more volatile assets.
Gold has a proven track record as an effective portfolio diversifier and a secure store of value.
The disadvantages of buying gold
Despite its advantages, gold also has drawbacks as an investment, including:
- Short-term price volatility: While gold has maintained its value over the years, the commodity has experienced erratic price movements in the short term. In 2023, many gold funds saw a decline in value as investors sold gold to invest in riskier assets amidst a surge in the stock and cryptocurrency markets. Gold returns have started to recover slowly as investors seek stability. Investors should be cautious of these price swings as market conditions evolve.
- Difficulty in estimating gold’s value: Some investors argue that valuing gold can be challenging compared to stocks, as gold lacks earnings or cash flow metrics for analysis.
- Lack of cash flow: Gold does not generate cash flow, which may deter investors seeking passive income like dividends.
- Potential tax implications: Depending on the type of gold asset owned, profits from selling gold ETFs may be taxed as collectibles rather than ordinary investments, resulting in a higher tax rate than the more favorable long-term capital gains rate. These rules apply to holdings outside tax-advantaged accounts such as a 401(k) or an IRA.
- Opportunities for better long-term returns elsewhere: While gold may perform well in the short term, investors can potentially achieve superior long-term returns by investing in a diversified portfolio of stocks or a stock ETF. This is a compelling reason to refrain from purchasing physical gold through promotions like those offered by Costco.
How to buy gold ETFs
When choosing gold ETFs, determine whether you prefer exposure to physical gold or public companies engaged in gold mining, each with its own risk profile.
As you craft your investment strategy, here are four steps to guide you:
- Define your financial objectives: Your investment choices should align with your goals. For instance, someone saving for a second home will have a different approach than someone saving for their child’s college education. Let your financial goals drive your decision-making.
- Research gold funds: When selecting commodity ETFs, consider factors such as performance, expense ratios, top holdings, and assets under management. This information can typically be found in a fund’s prospectus.
- Evaluate your asset mix: Before investing, assess all your assets and adjust your portfolio accordingly. Remember, maintaining diversification is key.
- Understand your investments: Regularly review your investments to take control of your finances and make any necessary adjustments. Utilize resources from your broker, such as consultations with a financial planner, and don’t hesitate to ask questions. There’s no substitute for actively managing your investments.
You can purchase gold ETFs through any of the top brokers for stock trading.
Conclusion
Gold has retained its esteemed status in society, serving as a portfolio hedge for investors against market volatility and geopolitical uncertainties.
Disclaimer: All investors are encouraged to conduct their own independent research on investment strategies before making decisions. Additionally, past performance of investment products does not guarantee future price appreciation.