Gold is a popular investment vehicle for investors looking to diversify and hedge their funds against inflation and other market forces. There are various ways to invest in this commodity. Asides from purchasing coins or bullions directly, one can invest in gold exchange-traded funds (ETFs). You can also buy gold as mutual funds or as shares of a company.
ETFs remain one of the best ways to invest in precious metals like gold. It is viewed by some as a low-cost and relatively liquid option to invest in. This is when compared to investments like shares or futures. Nevertheless, the price of gold can still experience big swings and this means ETFs can be volatile but not as much as stocks.
Related: 4 ETF Trading Strategies for Beginners
What Is An Exchange-Traded Fund?
This is a type of investment or exchange-traded product that is traded on a stock exchange. They are quite similar to mutual funds.
The difference is that they are bought and sold throughout a day from other owners on the stock exchange. Mutual funds on the other hand are bought and sold based on their price at the end of the day from an issuer. You can find more information here.
ETFs are a kind of security that is used to track an index, a commodity, sector, or other assets. They can be structured to track individual commodities like gold as well as large and diverse security collections. They are marketable securities and this means they can be bought or sold.
They operate with a mechanism that is designed for them to be close to their net asset value but occasionally, deviations may occur. There are several kinds of ETFs available. Some of these are the S&P 500 index, the NASDAQ-100 index, the total market index, etc.
Some of these large exchange-traded funds charge annual fees of around 0.3% of the invested amount and sometimes lower. Specialty ETFs however can charge up to 1% of the investment as annual fees. These annual fees are paid to the issuer from the dividends received from underlying holdings or sales of assets.
Investing In Gold ETFs
Gold exchange-traded funds are linked to gold prices. Each unit of the ETF is attached to a certain value of the commodity. Gold ETFs invest as well as hold the physical commodity on behalf of their investors. Whenever an investor invests in them, the physical commodity is stored even when this is not seen.
Normally, gold ETFs are divided into two categories. These are those that own the physical gold and those who own the mining stocks. Before you begin investing, you must decide if you prefer exposure to the physical commodity or public companies that mine it. Each of these asset classes has its different risk profiles.
Investors who are focusing on gold ETFs should consider the following:
Financial Goals
The category of exchange-traded funds you choose will largely depend on your goals and what you intend to achieve. It will also depend on your risk-averseness. So whether long-term or short-term, your financial goals should drive your decision.
Research Various ETFs
When trying to invest in commodity exchange-traded funds like gold, you should ensure to carry out proper research. You should not choose a commodity ETF manager or product just because it has low fees. Pay special attention to the fund’s performance, top holdings and other factors discussed below. You can always find this information in the fund’s prospectus.
ETF Size
The exchange-traded fund should have about $200 million in assets under management. This makes it less likely to be affected by market forces or manipulations at any significant premium that is net to its asset value.
Expense ratio
When looking to invest in a commodity exchange-traded fund, look for one that has an expense ratio that is below 1%. Anyone with an expense ratio that is over 1.5% is considered to be excessive.
Choose a Non-leveraged ETF
Leverage ETFs borrow money or use derivatives like futures and options for magnifying their returns. This makes them carry a greater risk so you should choose a non-leveraged one instead.
Outline Your Assets
Keep in mind that one of the goals of investing in gold is to diversify your investments. Therefore, before you invest, you should carry out an inventory of your assets so that you calibrate your portfolio appropriately. This is to ensure that you remain diversified.
Further Tips
Ensure to keep an eye on trends relating to the price of gold before you begin transacting. Just like you would buy stocks, you may want to buy at lower prices and sell when prices increase.
There is nothing like a hands-off investment. In essence, you have to periodically keep an eye and review your investments. By doing this, you will be able to improve your portfolio’s performance.
Avoid making long-term and heavy investments in gold. It is better in the short to medium term. Long-term returns do not seem to yield much annually. It is a wise idea to allocate about 5 to 15 percent of your portfolio to it. This will help to keep your returns stable. This website https://www.metal-res.com/gold-ira/best-gold-etfs/ provides more information on some of the best gold ETFs to invest in.
Conclusion
Gold has remained a desired commodity and maintained an important status since the beginning of time. It is a symbol of wealth as well as power and it is good for making investment portfolios stable and robust.
There are several ways to invest in this valuable commodity and one is through ETFs. However, before jumping into it, you must understand how the market operates. Do your research and ensure to follow wise counsel.