Investment Principle
Investors use gold exchange-traded funds (ETFs) to track and reflect the price of gold. Although the assets in the fund are backed by the commodity, the goal is not for the investor to own gold. Gold ETFs give investors the opportunity to benefit from gold’s performance or price movements.
How to Use Gold Exchange-Traded Funds
Gold ETFs offer some characteristics similar to those of defensive asset classes such as bonds, and many investors use them to hedge against economic and political disruption, as well as currency devaluation.
The price of gold tends to rise when the dollar is weak, so if your investment portfolio contains assets exposed to declining dollar risks, buying a gold ETF can help mitigate those risks. Conversely, selling a gold ETF can be a way to hedge if your portfolio is exposed to rising risks.
A gold ETF is an exchange-traded fund that can be used to hedge against gold commodity risks or to benefit from fluctuations in the price of gold itself. If an investor has increased risk in their portfolio assets as gold prices rise, owning a gold ETF can help reduce risk in that position.
Or if an experienced investor decides after sufficient research to sell gold, trading an inverse gold ETF may be a straightforward way to profit from declining gold prices.
Wider Uses
Although gold is a commodity fund, it can also serve as an industry fund. For example, if an investor wants exposure to the gold mining industry, owning a gold ETF may be a suitable investment strategy that could fit their portfolio.
While there are individual gold mining stocks and other precious metals indices, a gold ETF may be a simpler or more diversified way to invest in the gold mining industry. Some benefits come with equity ETFs, making them a useful tool for obtaining a variety of investments.
Gold ETFs can also be used as protection against regional risks or to gain foreign exposure. If a particular country relies solely on gold as a primary source of income, an investor holding portfolio assets that are exposed to risks in that country might sell or short a gold ETF as protection. Thus, if the price of gold falls, the short position in the gold ETF can help mitigate the investor’s losses.
Some Drawbacks
If you are seeking to actually own gold, you won’t be able to do so through a gold ETF. You will not actually own a gold bar, bullion, or gold coins. A gold ETF consists of gold contracts and derivatives and can only be exchanged for cash, not for gold itself.
Although equity ETFs in general have many tax benefits, gold can be classified as a “collectible” by the IRS, which can have tax implications.
Before engaging in investment, ask a certified accountant how purchasing gold ETFs will affect your specific tax situation.
Most Popular Gold Exchange-Traded Funds
You can explore several types of gold ETFs, but before including them in your investment strategy, look at the performance of some of the most popular funds. See how they perform and whether they fit your portfolio needs. Once you gain a better understanding of gold ETFs, you will find it easier to start investing in them.
Here are some of the most popular gold ETFs:
- SPDR Gold Trust ETF (GLD)
- iShares Gold Trust ETF (IAU)
- Invesco DB Gold ETF (DGL)
There is a variety of gold ETFs and other precious metals, so if you are looking to explore additional options for gold ETFs.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and ensure our content is accurate, reliable, and trustworthy.
U.S. Securities and Exchange Commission. “Advertising Bulletin: Summary of the Fund – Gold-Backed Bond Stock Strategy.”
Internal Revenue Service. “Issue Summary – Investments in Collective Trusts in Individual-directed Qualified Plans.”
Source: https://www.thebalancemoney.com/gold-etf-what-you-need-to-know-1214748
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