An Exchange Traded Fund (ETF) is a financial asset that provides exposure to a single or multiple assets. In most cases, ETFs track stock indices, which are made by index providers like FTSE and Bloomberg. ETFs track assets like stocks, commodities, and bonds.
In this article, we will look at what gold ETFs are and how you can trade them.
What is an ETF?
An ETF is a financial product that is created by large asset management companies like State Street, Vanguard, Blackrock, and VanEck, among others. It is a type of mutual fund that invests in assets and then becomes listed in one of the popular exchanges.
After that, people can buy and sell the ETF in a similar way that they buy stocks.
Types of ETFs
Broadly, there are two main types of ETFs: passive and active. A passive ETF is one that tracks an already established index like the Nasdaq 100 and S&P 500.
A good example of a passive ETF is Invesco QQQ, which tracks the Nasdaq 100. These funds have a lower expense ratio and are simpler to track.
An active ETF, on the other hand, tracks assets created by an experienced money manager. A manager can select a basket of stocks they believe will do well in the long-term.
A good example of such an ETF is Cathie Wood’s Ark Innovation Fund (ETF). These funds act as hedge funds and have a significantly higher expense ratio.
Beneath these examples, there are other types of gold ETFs. For example, there are ETFs that are based on sectors.
A tech ETF tracks technology companies while an emerging market bond ETF tracks bonds of EM countries like China and Russia.
What is a gold ETF?
A gold ETF is a financial product that provides traders an exposure to gold. It makes it possible for people to trade and invest in gold without owning the physical gold.
Also, a gold ETF makes it easy for people to invest in the metal as easy as how they invest in stocks. These funds usually track the performance of gold directly.
How gold ETFs work
Gold ETFs work in a relatively simple way. Gold miners ETFs track an index that tracks the performance of these mining companies like Barrick Gold and Newmont.
On the other hand, some gold ETF providers like Sprott own physical gold and then provide the fund as an ETF. Further, active gold miners ETFs are managed by a money manager who allocates funds to different mining stocks.
How to trade gold ETF CFDs
Some forex and CFD brokers provide gold ETFs in form of CFDs. A CFD means a contracts for difference as it tracks the price of a financial asset without holding the real asset. However, these CFDs are relatively rare.
Types of gold ETFs
Physical gold ETF
There are two main types of gold ETFs. First, there is a gold ETF that tracks the price of gold. The creators of these funds hold gold directly and then provide the ETF as a financial product.
For example, at the end of 2022, the iShares Gold Trust owned 14.4 million ounces of gold in its trust.
Gold miners ETF
Second, there are ETFs of gold mining companies. The idea is that gold mining companies like Barrick Gold and Newmont tend to have a close correlation with the price of gold.
However, at times, companies are riskier assets in that other factors affect their movements like earnings and management changes.
Inverse gold ETFs
Beneath these, there are other complex types of gold ETFs. First, there are inverse ETFs, which aims to benefit when the price of gold drops.
Their creators are usually short gold, meaning that your profitability will happen if gold drops. The risk of inverse ETFs is that losses can become significant when the price rises.
Leveraged gold ETFs
Second, there are leveraged gold ETFs. These funds or derivatives track the price of gold or gold stocks but with an amplification. For example, a 2X gold ETF will deliver double profits if the price of gold soars. On the other hand, these funds have higher losses if the price disappoints.
Factors to consider in a gold ETF
There are several things you need to consider when looking at gold ETFs. First, you should consider the expense ratio of the fund.
Expense ratio is the total cost involved in buying the fund. It can range from 0.01% to as high as 1.5% for some assets. In most cases, you should consider gold ETFs with the lowest expense ratio.
The iShares Gold Trust has an expense ratio of 0.25% while the Sprott Physical Gold Trust has a ratio of 0.41%.
Liquidity of the fund
Consider the liquidity of the fund. On this, you should consider a fund that has adequate trading volume. Trading an illiquid fund can be expensive because of the wide bid and ask spreads.
Premium or discount
You should consider the premium or discount to gold. In most cases, physical gold ETFs tend to have a discount to gold itself in terms of valuation.
Therefore, at times, it is recommended to buy those that have a bigger discount.
For leveraged gold ETFs, consider funds that have a relatively small leverage. We caution against going for gold ETFs that have a significant amount of leverage.
Is Gold ETF better than physical gold?
Most gold ETFs usually track the movement in gold prices. For example, the chart below shows the performance of gold in 2020 and that of the SPDR gold trust. As you can see, the two assets have had a similar movement.
Therefore, there are several reasons why some traders prefer trading gold ETFs instead of the real gold.
First, there is the aspect of price. For example, gold price is now trading at $1,848 while the SPDR gold ETF is trading at just $172.
Therefore, if you have $3,000, it means that you will make more money trading the ETF than the gold itself. Indeed, this is one reason why more people prefer trading silver than gold.
Liquidity, diversification and commissions
Second, trading an ETF that tracks gold mining companies is also a good way to have exposure to the price of gold.
Other benefits of trading ETFs are high liquidity, diversified assets, and lower commissions.
Disadvantages of ETFs vs Physical gold
However, there are disadvantages of trading in gold ETFs. First, many online brokers don’t provide them. Second, unlike the real physical gold, the ETFs are not available on a 24-hour basis. They are usually available only when the main indices in the US are open.
Finally, because of how ETFs are structured, their importance is usually for long-term investors.
Examples of top gold ETFs
There are many gold ETFs that you can trade in the United States. Some of the most popular gold ETFs are:
Sprott Physical Gold Trust
This is a fund that holds physical gold. It has an expense ratio of 0.41% and has over 3.15 million ounces of gold.
The main benefit is that it is redeemable for physical gold. At the end of 2022, it had over $5.75 billion in assets.
iShares Gold Trust
This is an ETF that tracks the LBMA Gold Price. It was started in 2005 and has over $25 billion in assets. The fund charges an expense ratio of 0.25%.
VanEck Vectors Junior Gold Miners ETF
This ETF tracks the price of the MVIS Global Junior Miners Index, which follows the performance of small cap companies that mine gold and silver.
Its custodian bank is State Street Bank and Trust Company. Some of its holdings companies are Yamana Gold, Kinross Gold, and Alamos Gold.
Sprott Gold Miners ETF
This is an ETF that tracks gold mining companies through the Solactive Gold Miners Custom Factors Index.
It follows companies that are listed in the United States and Canada, including firms like Barrick Gold, Franco-Nevada, Newmont, and Royal Gold among other
This article has explored about gold ETFs and how they work and identified some of the top examples of these funds.
Some advantages of investing in ETFs is that they are highly liquid and provide a diversified pool of investments. Some funds are also redeemable for physical storage.