Why would you own a gold ETF instead of actual gold? Simply put, it’s more convenient.
Owning a gold-focused ETF is a good way to get physical exposure to gold without the hassle of taking physical possession – finding storage, paying for storage and so on. Each share of a physically-backed gold ETF is just that: backed by a piece of gold.
This gold is stored in secure vaults in London and Switzerland, and the holdings within are audited and inspected on a regular basis. Some investors aren’t comfortable with this, and as stated above, if you’re not, then gold ETFs may not be the right choice for you.
You have three options to invest in physically-backed gold ETFs:
- SPDR Gold Shares (NYSEArca: GLD)
- iShares COMEX Gold (NYSEArca: IAU)
- ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
The differences between the three come down to both where the gold is held and the expense ratio of each of the funds. After recently slashing its cost, IAU is the cheapest, with a 0.25% expense ratio. GLD and SGOL have a 0.40% and 0.39% expense ratio, respectively. SGOL stores its gold in Swiss vaults; GLD and IAU have their gold stored in London.
The Future of Gold
Record market volatility and uncertainty has pushed gold demand to new heights and prices to new records. Asian countries are particularly large consumers of gold; the commodity is not just a store of wealth or a safe haven, but it’s also heavily used in jewelry.
In addition, ETFs have also become one of the world’s largest holders of gold bullion and demand for ETFs will only drive the fund providers to allocate more gold into their vaults. In fact, the World Gold Council recently said that quarterly demand for gold soared 414% in the second quarter of 2010, driven primarily by ETFs.
While gold isn’t necessarily a volatile instrument, it has periods where it comes in and out of favor. To effectively invest in gold ETFs, you need to watch them for any signs of a drop-off and act accordingly.
From a tax viewpoint, physical gold and physically-back gold ETFs are treated as collectibles. If held for less than one year, they’re taxed at the normal 15% rate. If held for more than a year, they’re taxed at a 28% rate.
If physically-backed gold ETFs aren’t your style, there are other types of gold funds:
- Market Vectors Gold Miners (NYSEArca: GDX) and Market Vectors Junior Gold Miners (NYSEArca: GDXJ) both hold the stocks of mining companies. These ETFs only track the performance of these companies – they do not track the spot price of gold. The companies held in these funds tend to perform better when the price of gold is elevated, as it is now.
- PowerShares DB Gold (NYSEArca: DGL) owns gold futures contracts, rolling them forward instead of taking physical delivery each month. Like all futures-backed ETFs, this fund is a partnership and generates a K-1 at tax time.
As a premium member, you can research any gold ETF using the ETF Resume. You can also use the alert tool to be notified of a trading opportunity in gold ETFs.