Are you considering investing in a gold ETF? These investment vehicles could allow you to reap the benefits of gold investing without needing to buy actual gold.
But are they right for your investment strategy? Learn our answer to “what is a gold ETF?” and everything you need to know about this gold-backed investment fund.
What Is a Gold ETF?
An exchange-traded fund (ETF) is a type of investment fund that investors trade on stock exchanges. ETFs contain securities such as stocks, bonds, and commodities.
When you invest in an ETF, you invest in all of the securities within the fund. These funds typically track a specific sector or commodity — such as gold.
So what is a gold ETF? It’s a specialized type of exchange-traded fund that holds gold assets. These funds can contain gold bullion, a mixture of bullion and futures, or even more diverse gold investments, such as gold mining stocks. The value of a gold ETF usually matches the value of gold; when gold’s price increases, the ETF’s value should increase in turn.
How Do Gold ETFs Work?
You can buy shares of an ETF on a stock exchange the same way you would purchase any other type of stock. One share of a gold ETF is equivalent to a specific portion of the gold or gold-related assets within the fund. The valuation will usually fluctuate with the price of gold, and you can sell your share quickly and easily on the exchange.
Types of Gold ETFs
Gold ETFs are relatively straightforward investment vehicles, but the different types of gold ETFs make this form of investing a little more complicated. Be sure you understand the main types of gold exchange-traded funds below.
Physically Backed Gold ETFs
A physically backed gold ETF is a fund that contains actual gold bullion, coins, and bars. The securities in the fund track the current value of gold within the market, and every share has a value proportionate to one troy ounce of gold.
Buying shares in a physically backed gold ETF is an effective way to take advantage of the benefits of gold investing without needing to own physical gold.
Synthetic Gold ETFs
Unlike physically backed gold ETFs, synthetic gold ETFs invest in gold-backed assets rather than physical gold. Most synthetic gold ETFs hold derivatives, such as gold futures. While fund managers usually try to keep these ETFs at an asset value close to the spot price of gold, the actual valuation can fluctuate.
Leveraged Gold ETFs
Leveraged gold ETFs seek to amplify the returns of the underlying gold market index. They do this by investing in gold futures contracts, which allow the value of the ETF to increase faster than the price of gold. These funds take advantage of short-term price fluctuations.
Comparison with Other Gold Investment Options
Gold ETFs are just one of the many forms of gold-backed investing. Explore these other common gold investment options.
The value of physical gold dictates the value of a physically backed gold ETF, so these two forms of investing can be equally lucrative. But many investors enjoy being able to take physical possession of their gold assets.
You also don’t need any knowledge of the stock exchange to invest in physical gold. Just purchase gold through an online or in-person dealer and store it somewhere safe, then sell it when you’re ready.
Gold Mining Stocks
Gold mining stocks are shares in companies that mine gold and other precious metals. You can invest in these stocks individually or as part of an ETF or mutual fund. The value of gold mining stocks roughly matches the value of gold, but they typically decline during periods of recession.
When you buy a gold future, you agree to purchase a quantity of gold at a certain price at a later date. If the gold’s actual value on that date is higher, you’ll profit; if it’s lower, you’ll lose money on your investment.
Investing in gold futures requires an in-depth knowledge of market trends, but it can be highly lucrative if you know what you’re doing. If you’re looking for a less volatile investment strategy, you may be better suited for gold ETFs.
What Are Some Factors that Can Affect the Price of a Gold ETF?
So what is a gold ETF’s value determined by? The price of a gold ETF usually matches the value of gold, which is measured in terms of its spot price (or price per troy ounce). Gold’s spot price depends on factors like:
- Supply and demand
- Interest rates
- Gold production and mining rates
How to Invest in a Gold ETF
Online brokers allow you to invest in gold ETFs from the comfort of your home. If you’re new to the stock exchange, you may want to use a beginner-friendly platform like Fidelity, Robinhood, or Vanguard.
Advantages and Risks Associated with Gold ETFs
Gold ETFs face the same risks as investing in physical gold. Gold is relatively volatile, as the price changes each day. However, with a gold ETF, you don’t need to worry about storing physical gold and protecting it against theft, water damage, or natural disasters.
In general, gold has historically been a good hedge against inflation and is a good way to diversify your portfolio with a relatively standard risk profile. Buying shares of a gold ETF is a convenient way to gain these benefits.
What Is a Gold ETF’s Tax Implications?
The IRS taxes gold ETFs the same as other stocks and bonds. You’ll need to report the income gained on an ETF on your 1099 tax form.
The tax rate for gains on ETFs depends on your income threshold but may be as high as 37% in 2023. However, the structure of ETFs seeks to minimize the tax bill for investors, and you’ll likely pay less in taxes than you would with a similar mutual fund.
If you’re not sure how to report your gold ETF on your taxes, consider talking to a CFA or tax advisor.
Learn More About Gold Investment with Learn About Gold
If you are now interested in investing in gold ETFs, we highly recommend you try out our gold IRA partner quiz, where you can get matched with a gold IRA partner based on your needs which will help you through the process. If you want to learn more before you try investing, or are simply curious, take a look at our blog for more articles.