The range and diversity of Exchange Traded Funds has grown significantly in recent years. At its most basic a gold ETF (GEFT) is an Exchange Traded Fund that seeks to track the price of gold. These Funds track a variety of different market indices such as the FTSE, specific sectors such as mining, particular currencies or commodities such as gold. But what does this mean and what are the advantages and disadvantages of investing in them?
One of the first things to remember is that if you chose to invest in a gold ETF you do not actually become the owner of any gold. They are commodity funds that are backed by gold. The reason for investing in a Gold ETF is to gain exposure to changes in the performance of gold over time.
There are a number of different gold ETFs in which you can invest. These include funds that are denominated in US dollars and others that are denominated in pound sterling.
Why invest in a Gold ETF?
There are a number of reasons why investors choose to invest in a gold ETF. These include:
• It can be a good way to limit exposure to poor performance by the dollar since the price of gold tends to increase when the dollar weakens.
• It can help to hedge against investments that are at risk if the price of gold rises.
• It can enable an investor to gain exposure to the gold-mining industry without having to invest in individual gold-mining stocks.
• It can be used as a buffer against regional risk where an investor can short the ETF in the event of gold dropping in value.
• Gold ETFs are very liquid and easy to trade; likewise, dealing costs and management fees are usually low.
Some of the risks
As with any investment product there are a number of associated risks. Gold ETFs track the price of gold and the price can go down as well as up and, if this happens, it will have an impact on your investment.
There can also be capital gains implications in some territories that apply to gold ETFs which do not apply to other Exchange-Traded Funds. It is important, therefore, to establish this before investing.
And, of course, whilst a gold ETF might look attractive in the name you need to remember that you will not catch sight of any actual gold (let alone own it). A gold ETF does not, therefore, have the same level of investment security that comes with investing in physical gold.
Gold ETFs are a popular form of commodity trading and have a number of benefits for those looking for a diversified portfolio of investments. If you are thinking of investing in one, however, it is important to make sure that you fully understand what you are investing in and the risks associated with doing so.
Kyle Stammers writes regularly about investment products for a range of websites and blogs. He is particularly interested in Exchanged Traded Products such as the gold ETF.