Investors’ need to seek more exposure to commodities such as gold and silver led investment management companies such as BlackRock to create such an Exchange Traded Fund (ETF).
ETFs are publicly traded funds. That combines the best of both worlds. On the one hand, you have the diversification that a fund gives, and, on the other, by listing on the Stock Market, you can buy and sell as many times as you want (which provides you with immediate liquidity).
The first ETF was launched in 1993, but it was not until 2005 when BlackRock created the iShares Gold Trust, known as IAU, which has an exposure to gold bars that BlackRock buys and which is guarded in vaults in London, New York, and Toronto.
A gold ETF is a listed fund whose price will be linked to the gold price’s evolution. Just as we buy ETFs that replicate stock indices, we can buy ETFs that replicate the price of gold.
How to choose a gold ETF
GOLD ETFS share a series of characteristics with traditional ETFs that we must consider when opting for one product or another.
Next, we will see the 5 most important aspects when investing in this type of product.
- TRACKING ERROR
As with index funds, one of the most important factors when contracting a gold ETF is the precision with which the price of gold follows. That is their tracking error. The smaller, the better.
As with any fund / ETF, costs matter. Much.
In the case of ETFs of stocks or bonds, the expenses are oriented to defray costs such as the broker’s or manager’s commissions.
As far as GOLD ETFS are concerned, the commissions mainly cover the expenses of the purchase, audit, transportation, and storage of the yellow metal (in the case of being backed by physical gold).
- BACKING IN PHYSICAL GOLD
When investing in gold through ETFs, it is crucial to know if the fund is backed by 100% gold. That is if the fund makes a physical replica of its “reference index.”
There are a wide variety of GOLD ETFS on the market. Many of them will back up your value with the same amount of gold, that is, they are of a physical replica. However, we will also find other ETFs that replicate the price of gold synthetically through the use of derivatives.
- OWNERSHIP AND RIGHT TO GOLD
Buying an ETF backed by physical gold does not imply ownership of that gold. On many occasions, fund units only give us a right to gold.
We have the right to request the physical gold that corresponds to us according to the participations that we have in the fund.
- BUY-SELL FORK
The same ETF can be traded in different markets.
In the financial markets, the buy-sell fork represents two prices: On the one hand, the highest price offered by buyers. On the other, the lowest price offered by sellers. The smaller this fork, the higher the liquidity of the product.
Depending on the market in which we operate, we may be paying an extra cost for the same product.
Although it is more advisable to invest in physical gold, buying GOLD ETFs is a very attractive strategy for those who have small retirement portfolios or do not want to overcomplicate things. On the other hand, if you considering a gold IRA rollover with physical gold, make sure to check out this article from Rare Metal Blog.
And you, do you have any GOLD ETFs contracted? If not, what is the reason? Do you prefer to invest in physical gold directly? Leave your comment.