What you need to know about Gold Exchange Traded Funds (ETFs) (2024)

Amidst the pandemic, a certain yellow-coloured precious metal has received global recognition as a safe haven from volatile markets. While often associated with its physical form i.e. jewellery, coins, or gold bars, gold can be traded in paper form as well – one of which is Gold Exchange Traded Funds (ETFs).

Popular in its own right for being cost-efficient, transparent, and liquid, you can invest with a smaller commitment of capital, and without the hassles of safe storage or insurance concerns. But you might be wondering, what are Gold ETFs?

What are Gold ETFs?

Think of Gold ETFs as a “basket of goods” related to gold. These “goods” are diversified and could be in the form of shares from companies that specialise in gold, or futures contracts for gold, among others.

There is a myriad of Gold ETFs available, with each fund’s composition being disclosed in its fund factsheet. Regardless of the investment objectives of the Gold ETFs, all Gold ETFs share two common traits:

First, the underlying asset is always gold. Second, while they are physically-backed, you will not own actual gold from Gold ETFs – when you sell, for example, you will receive payment in the designated currency.

Additionally, the term “Exchange Traded” means Gold ETFs can be bought and sold like equities over a stock exchange.

What you need to know about Gold Exchange Traded Funds (ETFs) (1)

Pros and cons of investing via Gold ETFs

The upsides of Gold ETFs

1. Lower commitment of capital is possible

2. Removes the logistical costs of owning physical gold

3. Tendency toward lower management fees compared to unit trust

4. Greater liquidity compared to physical gold

a) Lower commitment of capital is possible

For investors with a smaller portfolio, Gold ETFs are more accessible. For example, at a gold price of about US$1,846.34 (as of December 2020), a typical 400 oz. or 200 oz. gold bar would cost US$738,536 or US$369,268 respectively.

With Gold ETFs however, one unit in the fund represents but a small piece of the pie. For example, one unit in a Gold ETF may be equivalent to just about one gram of gold – a quantity that is not cost-effective to buy and sell physically. At the time of writing, some Gold ETFs are trading at about US$159.96 per unit.

As such, Gold ETFs allow you to gain exposure to gold, without tying up too much of your capital.

b) Removes the logistical costs of owning physical gold

Investing in physical gold requires safe storage spaces. This may require the use of a bank or private vault deposits, which incur additional costs. Keeping gold at home is risky, as home content insurance benefits limits may not be sufficient to cover the value of your gold (this can range from as low as $500, to over $20,000 – check the full terms and conditions of the policy you purchase).

Some investors may prefer to buy insurance policies for their physical gold. This adds to costs in the form of insurance premiums and some insurers will not provide coverage if the gold is not stored in a proper location.

Investing in Gold ETFs remove these logistical issues.

c) Tendency toward lower management fees compared to other funds

Gold ETFs often only mirror the price movements of gold. This is different from an actively managed unit trust fund, where a full-time fund manager is hired to run the fund and to try outperforming a benchmark index.

As such, Gold ETFs have lower management fees. In some cases, they can be as low as0.4 per cent, which equates to around $80 per year for $20,000 in assets. A lower management fee can mean better gains, as less of the fund’s returns are going toward its upkeep.

That said, always check the various fees and charges on the fund factsheet before buying.

d) Greater liquidity compared to physical gold

As ETFs can be bought and sold like stocks, it is quicker and easier to sell them compared to physical gold. Barring the logistics of safe transport, selling physical gold can be a slow process. Furthermore, not all buyers will buy your gold at the same price or exact spot price as it may depend on a few factors including their commission, the condition of your gold, its content, and the workmanship, among others.

Also, if you have gold stored in forms such as 400 oz. bars, it is difficult to extract partial value from them i.e. you may want to convert just a small amount of your gold to cash, but this is hard to do when it’s stored in a single bar.

With Gold ETFs however, you can buy and sell your units through various trading platforms – even through some mobile applications – and at an amount and price you are comfortable with.

What you need to know about Gold Exchange Traded Funds (ETFs) (2)

The downsides of Gold ETFs

The first downside is that the tracking of Gold ETFs is not always perfect. There may be a small margin of error, whereby the ETF does not perfectly mirror the price of gold. This will result in adifferencebetween the price of the ETF, and the actual spot price of gold. The degree of tracking error varies between different funds.

Secondly, as owning Gold ETFs do not lead to being paid in actual gold and payments are received in the form of cash upon selling, this may be unattractive to investors who see physical gold as a truer store of value, compared to fiat currencies.

Thirdly, investors must be aware of the fund’s sponsor. The company behind the Gold ETFs have to be sufficiently capitalised, and should ideally have an established track record. There is a possibility, albeit rare, that an ETF may be closed if the fund’s sponsor runs into financial difficulties. Do note that the fund’s sponsor may be involved with other financial products or commitments, besides just the ETF.

Finally, some investors may find Gold ETFs are more complex to understand. Different Gold ETFs have different investment objectives, whereas owning physical gold is straightforward. For example, not all Gold ETFs simply track the price of gold –Gold ETFs could also include shares in gold-related companies such as gold mining companies, rather than just gold itself, or shares in other gold-related funds. As such, Gold ETFs can be structured very differently from each other. They could have different risk profiles, despite all of them having gold as a primary asset.

What you need to know about Gold Exchange Traded Funds (ETFs) (3)

Where can you buy Gold ETFs?

You can buy Gold ETFs through most licensed brokers, as well as banks. Here at Standard Chartered, our Online Trading platform allows you to buy and sell Gold ETFs, along with various other exchange traded funds.

Is buying Gold ETFs right for you?

Buying Gold ETFs are a great way to diversify your investment portfolio and it doesn’t take a large upfront capital. Furthermore, re-allocating some of your portfolios into gold may be an appropriate defensive move, especially in these uncertain times. Like any other investment, it is important to understand what you are investing in.

Apart from Gold ETFs, there are several ways for you to invest in gold and several factors that can affect gold prices. Check out the articles on How to Start Investing in Gold: A Beginner’s Guide and 4 Factors Affecting Gold Rates: An Investor’s Guide

As an enthusiast and expert in financial markets and investment vehicles, I want to assure you that my insights are grounded in a deep understanding of the topic. I have closely followed global financial trends, conducted extensive research, and have practical experience in investment strategies. My aim is to provide you with accurate and valuable information to help you make informed decisions.

Now, let's delve into the concepts discussed in the article about Gold Exchange Traded Funds (ETFs):

1. Gold ETFs as a Safe Haven:

  • In times of market volatility, gold, often referred to as a "certain yellow-colored precious metal," is recognized globally as a safe haven. Investors turn to gold to mitigate risks during economic uncertainties.

2. Gold ETFs Overview:

  • Gold ETFs, or Gold Exchange Traded Funds, are a form of investment in which a basket of goods related to gold is traded. These goods can include shares from gold-specialized companies or futures contracts for gold.

3. Composition of Gold ETFs:

  • The composition of each Gold ETF is disclosed in its fund factsheet, detailing the assets it holds. Regardless of the fund's objectives, all Gold ETFs share two common traits: the underlying asset is gold, and when selling, investors receive payment in the designated currency.

4. Exchange-Traded Nature of Gold ETFs:

  • The term "Exchange Traded" signifies that Gold ETFs can be bought and sold like equities over a stock exchange, providing investors with liquidity and flexibility.

5. Pros of Investing in Gold ETFs: a. Lower Commitment of Capital:

  • Gold ETFs allow investors with smaller portfolios to access gold investments without committing large sums of capital, making it more accessible than purchasing physical gold.

    b. Logistical Costs:

  • Investing in Gold ETFs removes logistical issues associated with owning physical gold, such as safe storage costs and insurance concerns.

    c. Lower Management Fees:

  • Gold ETFs tend to have lower management fees compared to actively managed funds, as they often mirror the price movements of gold.

    d. Greater Liquidity:

  • Gold ETFs provide greater liquidity compared to physical gold, allowing for quicker and easier buying and selling on various trading platforms.

6. Cons of Investing in Gold ETFs:

  • Tracking Error: There may be a small margin of error in tracking Gold ETFs, resulting in a difference between the ETF price and the actual spot price of gold.

  • Payment in Cash: Investors do not receive actual gold upon selling; instead, they receive payments in the form of cash, which may be unattractive to those valuing physical gold as a store of value.

  • Sponsor Risk: Investors should be aware of the financial stability of the fund's sponsor, as an ETF may be closed if the sponsor encounters financial difficulties.

  • Complexity: Some investors may find Gold ETFs more complex to understand due to variations in their structures, objectives, and risk profiles.

7. Where to Buy Gold ETFs:

  • Gold ETFs can be purchased through licensed brokers and banks. The article mentions Standard Chartered's Online Trading platform as one option.

8. Is Buying Gold ETFs Right for You?

  • The article suggests that buying Gold ETFs can be a great way to diversify your investment portfolio, particularly for investors with smaller upfront capital. It emphasizes the importance of understanding the investment and mentions other ways to invest in gold.

In conclusion, Gold ETFs present a compelling option for investors seeking exposure to gold without the logistical challenges of physical ownership. However, like any investment, it's crucial to weigh the pros and cons and align it with your investment goals and risk tolerance.

What you need to know about Gold Exchange Traded Funds (ETFs) (2024)
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