Gold exchange-traded funds (ETFs) are collections of assets that are backed by gold. These funds enable investors to invest in the gold market for a much smaller initial investment than purchasing the physical commodity themselves.
These ETFs have grown in popularity since the first gold ETF, the SPDR Gold Trust (GLD), was launched in 2004. There are now 30 Gold ETFs traded in U.S. markets with more than $75B in assets under management.
The popularity of these ETFs is driven by golds relationship to the stock market – it normally acts in the opposite fashion. So, when the stock market is heading down, gold is normally heading up. This makes it a relatively safe investment during times of uncertainty.
Before these ETFs were available, gold investing wasn’t a possibility for most investors, because you needed to own physical gold. ETFs make it possible for investors to get involved at a much lower price.
3 Things You Should Know Before You Buy Gold ETFs
Before you check out our recommended Gold ETFs, you might want to know the following:
1. Commodities Have Higher Capital Gains Tax For Long-Term Investors
Gold and other metal ETFs are considered to be collectibles for tax purposes, which means they are taxed at a higher rate over the long-term.
Instead of paying 20% for your long-term capital gains, you have to pay 28% – ouch! Because of this, you might want to consider keeping your investments to the short-term – less than a year.
2. Some Gold ETFs Track Gold-Related Companies
Some ETFs track companies closely linked to gold, such as mining companies. This can cause some confusion because (depending on which assets you are invested in) the assets might not behave in line with the price of gold.
It is worth doing your research so that you understand exactly what you’re investing in and the risks attached to that investment.
3. The Price of Gold Can Go Up As Well As Down
As with any investment, your money is at risk. The price of gold can go up as well as down, and returns are not guaranteed. Since gold acts inversely compared to the stock market, whether this is a good time to invest in gold will depend on your view of the market.
Our Recommended Gold ETFs
Not sure where to invest? Here are 5 of our suggestions:
Largest Gold ETF: SPDR Gold Trust [GLD]
The SPDR Gold Trust is the oldest and biggest Gold ETF, with $37B in assets under management. This ETF tracks the gold price using gold bars (stored in London).
Consequently, it follows changes in spot price very closely. This ETF is very liquid and has a very small spread, so it’s easy and cheap to trade it.
Because this ETF is physically backed by gold, it counts as a collectible, so long-term gains will be taxed at the special rate of 28%.
Low Expense Ratio Gold ETF: iShares Gold Trust [IAU]
The iShares Gold Trust is a popular alternative to the SPDR Gold Trust.
It is backed by gold bars held in a variety of locations and, like GLD, tracks the gold spot price (less liabilities and expenses).
It is smaller than GLD, with 14B under management, but has the benefit of a low expense ratio (0.25%), which is smaller than that of many of its competitors.
This ETF has good liquidity (although lower than the SPDR Gold Trust) and is relatively cheap to trade (although, again, not as cheap as SPDR).
Like GLD, this ETF is physically backed by gold and counts as a collectible, so long-term gains will be taxed at the special rate of 28%.
Levered Gold ETF: Direxion Daily Gold Miners Index Bull 3x Shares [NUGT]
The Direxion Daily Gold Miners Index Bull 3x Shares offers leveraged exposure (3x) to the NYSE Arca Gold Miners Index, which is an index of gold mining firms.
The NUGT has very high liquidity because most investors use it to make short-term bets on the movement of the NYSE Arca Gold Miners Index.
Physically Backed Gold ETF: Perth Mint Physical Gold ETF [AAAU]
The Perth Mint Physical Gold ETF tracks gold and is backed by gold bars held in – you guessed it – Perth, in the Perth Mint (owned by the state of Western Australia).
This ETF has assets under management of just 140M but is one of the cheapest gold ETFs to invest in, making it ideal for investors with fewer funds to get started.
It has a low expense ratio of 0.18%, and investors can even exchange their shares for physical gold bullion – although this is inefficient at lower quantities.
As with the GLD and IAU, U.S. investors should be warned that long-term investments are taxed at 28%.
Best Swiss Gold ETF [SGOL]
Aberdeen Standard Physical Swiss Gold Shares, SGOL, is a gold ETF backed by gold held in Swiss vaults.
With assets under management of just under 1B, this is another smaller fund, but what makes it popular is the location of the underlying commodities – Switzerland.
This fund has excellent liquidity, so its easy to trade, and has a relatively low expense ratio of 0.17%.
Like other physically-backed gold ETFs, long-term investments are charged at the special rate for collectibles (28%).