Gold ETFs : The Basics and Whether you Should Trade Them

Gold price has been in a strong rally recently. In 2020 alone, the price has jumped by more than 27% and is slightly below its all-time high of $2,065. This trend is partly because of the weaker US dollar, low interest rates, and high demand from investors. Remember, gold is one of the best safe haven assets.

Gold chart in 2020

As a trader, there are several options you can use to trade gold including gold futures, exchange traded funds (ETFs), and even gold stocks. In this report, we will look at gold ETFs and how you can trade them.

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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.

There are many types of ETFs. Among them are technology ETFs, which focus on tech companies and consumer staples, that focus on consumer companies like Unilever and Clorox. Other popular types are bond ETFs, fixed income ETFs, and specialty fund ETFs.

What is a gold ETF?

There are two main types of gold ETFs. First, there are ETFs that are known for investing in gold mining companies. Among the biggest gold mining companies are Barrick Gold, AngloGold Ashanti, and Newmont, among others.

Examples of this type of ETFs are:

VanEck Vectors Gold Miners ETF
VanEck Vectors Junior Gold Miners ETF
Direxion Daily Gold Miners Index

The three have assets worth more than $18 billion, $6 billion, and $1 billion, respectively.

Second, there are gold ETFs that have invested purely in gold. Examples of these are SPDR Gold Trust that has more than $77 billion in assets, iShares Gold Trust that has more than $31 billion in assets, and SPDR gold minishares trust that has more than $3.4 billion in assets.

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 this year and that of the SPDR gold trust. As you can see, the two assets have had a similar movement this year.

Therefore, there are several reasons why some traders prefer trading gold ETFs instead of the real gold.

Different Prices

First, there is the aspect of price. For example, gold price is now trading at $1,968 while the SPDR gold ETF is trading at just $180. 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.

Final thoughts

Gold ETFs have been growing in popularity recently, mostly because of the rising price of gold. Indeed, inflows have been rising at the fastest pace in years recently. As a result, many traders have found themselves choosing between trading in gold directly and trading other gold derivatives.

As we have seen above, there are several benefits and risks of trading gold ETFs. Still, these are safe options that you can use if you believe that the price of gold is relatively higher.