For gold investors seeking an advantageous new method of investing in gold that doesn’t require the investor to own physical gold, trading in exchange traded funds may be a good fit for their needs.
Exchange-traded funds, or ETFs, are basically a hybrid of stocks and mutual funds. ETFs have the diversification of mutual funds, but are bought and sold on stock exchanges like stocks.
Gold ETFs track the performance of gold-related investments, or the direct price of gold. Gold ETFs are also commonly backed by reserves of gold held by the financial institution issuing the ETF. ETFs are commonly only available to individual investors through brokers.
ETFs are less expensive to buy than mutual funds, as they charge lower fees. In fact, ETF investors pay expenses of $25 per each $10,000. Actively managed funds usually rate annual expenses of $91 for every $10,000 of assets.
For investors, ETFs are a popular means of making quick and large wagers on segments of the economy such as gold and oil, among others, as they can be bought on margin. ETFs are also commonly used to hedge other investments on commodities, stocks and bonds.
Gold ETFs can track the gold market in a number of ways — some of them even inversely track gold, meaning when prices dip, the value of the ETF goes up. Gold ETFs that bet on gold prices continuing to rise have done extremely well in recent years, as the price of gold has steadily, inexorably moved upward.
There are a number of factors pointing to continued growth for gold ETFs. Increased buying of gold by the central banks of several countries, including China and India, will continue to tighten the gold supply, driving prices up. Inflationary fears as the world economy comes out of the worst economic crisis since the 1940s will also continue to put upward momentum on gold prices. International tensions may also contribute to increased prices, as this has been a historical pattern. Actions by the Fed to stave off recession may also devalue the U.S. dollar, causing gold investing to increase.
For investors seeking to purchase gold ETFs, here are a few notable funds:
SPDR Gold Trust (GLD) The original gold ETF remains the most popular kid on the block. The ETF buys 400 ounce bars and issues shares at 10 percent of the price of an ounce.
ProShares Ultra Gold (UGL) tracks the price of gold at double its price. It’s risky, but offers great rewards.
Market Vectors Gold Miners fund (GDX) tracks the performance of the NYSE Arca Gold Miners Index. This index consists of 32 mining companies.
Powershares DB Gold Fund (DGL) This ETF tracks gold futures contracts upward.
These are just a few of the many ETFs available for investment on the market. ETFs aren’t for every investor, and you should read up on them and consult with a financial planner before having your broker invest in these financial products.
