Gold ETFs: Everything You Need to Know
Over recent decades, gold has proven to be a popular asset for investors who want to hedge against various risks such as market turbulence, political unrest, recessions and inflation. The gold market is very accessible and highly liquid. There are several ways investors can invest in the precious metal.
Besides purchasing physical gold bullion, another method of investing in gold is through Exchange-Traded Funds (ETFs). Gold ETFs can be a highly liquid and low-cost option when compared to trading gold futures or buying shares in gold mining companies. In this article, we will look at gold ETFs, explain what they are, how they work and how you can start trading them!
Whether in physical form or through an ETF, investing in gold doesn’t have to be exclusively for the risk-averse. Precious metals can be an attractive form of investment at any time and for any investor, depending on the length of your investment horizon and the targeted returns you’ve set.
If you think precious metal trading through ETFs isn’t an exciting challenge, then think again. The same rules apply to selecting ETFs as any sector. You have to do your homework, apply forensic analysis and then commit your decision to the market, just as if you were investing in any other security, such as Forex, shares or equity indices.
What are Gold ETFs?
An exchange-traded fund is a basket of securities which aims to track an underlying asset, sector or economy. ETFs are traded on stock exchanges, much like a company's shares.
Gold ETFs, therefore, are funds which are designed to track the performance of gold. Whilst this may be achieved by the funds investing in the physical commodity, they may also invest and trade in gold related financial instruments; such as futures contracts or shares in companies which are engaged in the gold industry. The investment approach varies from fund to fund and may include a combination of investments in various different financial instruments.
ETFs which are backed solely by physical gold track gold’s spot price, with their bullion, coins, and bars protected in secure vaults on the investors’ behalf. Each share in the ETF is worth an equal share of one ounce of the fund’s gold.
Some of the advantages of investing in gold exchange-traded funds:
- Security - ETFs mean that an investor does not have the security and insurance worries associated with storing precious metals in their home.
- Cost-effectiveness - the overall expense and risk involved when you buy and sell ETFs are less than the cost incurred in purchasing, storing, insuring, and finally selling any physical gold.
- Straightforward - you don’t have to personally identify the coins or bars which you want to own. You don’t need to order the precious metal over the internet and then wait for the secure package to get delivered. Instead, you access a trading platform - like MetaTrader 5 - select the ETF you want to trade or invest in, and you have bought into the exciting world of investing in gold!
- Liquidity - Many gold ETFs are highly liquid financial products, meaning investors can divest from them quickly, securely and efficiently. There is no need to find a buyer for the physical asset; traders need only access their trading platform in order to sell.
Interested in learning more about trading and investing? Why not sign up for one of our trading webinars? These live sessions, conducted by professional traders, take place every day from Monday to Friday and are absolutely free! Click the banner below to see the upcoming schedule and register for a webinar today:
Popular Gold ETFs
Performance in 2020
SPDR Gold MiniShares Trust
Aberdeen Standard Physical Gold Shares ETF
SPDR Gold Trust
Invesco DB Gold Fund
iShares Gold Strategy ETF
Source: Table created by author with information from The ETF Database - 19 April 2021
Listed above are some of the best performing and most popular gold ETFs based on their performance in 2020. As can be seen, the performance and returns during 2020 were exceptional due to the precious metal’s safe-haven appeal and a turbulent year for the financial markets.
Gold reached a record high of over $2,060 per ounce during 2020, a rise of 24.5% during the year, and 2020 represented the best year for gold appreciation since the Great Recession years of 2008-2009.
How to Choose the Best Gold ETF
When considering trading or investing in gold ETFs, investors and traders should consider both the historic performance and the expense ratio (as shown in the table above).
The reputation of the firm controlling the ETF might also be a consideration. Some of the firms listed above have a respected legacy and distinguished reputation in the financial markets.
It is also important to look at the assets which the fund has in their portfolio, something which ETFs are very transparent with. As mentioned earlier, some ETFs will track gold solely by holding the physical asset. On the other hand, others will invest in gold via other financial instruments and some will take a mixed approach.
For example, currently, the Invesco DB Gold Fund portfolio is made up only of gold futures. Therefore, it should only be invested in by people interested in gaining exposure to commodity futures. This approach will not appeal to everybody due to the more volatile nature of this financial instrument.
On the other hand, the Aberdeen Standard Physical Gold Shares ETF, as the name suggests, is physically backed by gold bars which are held in vaults located in Zurich and London. Every day, they produce an updated list of how many bars they currently hold.
Depicted: Admirals (Formerly Admiral Markets) MetaTrader 5 - Aberdeen Standard Physical Gold Shares ETF (#SGOL) Daily Chart. Date Range: 21 November 2018 - 15 April 2021. Date Captured: 15 April 2021. Past performance is not necessarily an indication of future performance.
Are Gold ETFs a Good Investment?
Gold is popular among investors because precious metals get used to hedge against currency devaluation, recessions, inflation, and deflation. Gold also provides a safe-haven during times of market turbulence and economic uncertainty.
Many investors like the simplicity of gold; they know it’s a tangible asset. They know it has intrinsic worth, not just for the manufacture of jewellery but also for manufacturing processors and other industrial applications. Gold investments through the wrapper of an ETF make a logical choice for many investors.
Gold ETFs have also proven to be popular amongst pension holders looking to diversify into precious metals and spread the risk of assets in their portfolio. Several UK pension firms specialise in offering exclusive access to gold ETFs, and they will handle the whole process, including storage for their clients.
As previously highlighted, the overall cost and risk relating to ETFs are fewer than involved when you buy, insure and store physical gold. The expense ratio of physical gold ETFs can be approximately 0.20% of the total investment size. In comparison, private investors who buy physical gold can pay a considerable premium or spread over and above the spot price to acquire the precious metal in similar quantities to the ETF.
Gold ETFs Performance
The returns of gold EFTs during 2020 were significant due to the rise in the gold price during the year. Gold futures’ price increased by approximately 18% year on year up to February 2021, just below the increase in the S&P500 of 19% over the same period.
Gold-backed ETFs achieved record inflows during 2020. The inflows helped to increase global holdings to a new record high during 2020.
According to the most recent World Gold Council data, gold inventories increased by over 33%, closing the year out at a record 3,752 tons. 870 tons of gold were added to ETFs in 2020 worth approximately $48 billion, 230 more tons than during the previous record year of 2009.
For eleven months in series up to November 2020, more gold moved into ETFs. However, during November, investors began to reduce their exposure to precious metals. Instead, they increased riskier asset exposure due to the positive sentiment associated with the US election and optimism over COVID-19 vaccines.
How to Trade CFDs on Gold ETFs
With Admirals you can trade Contracts For Difference (CFDs) on over 300 different ETFs! CFDs allow traders to attempt to profit from both rising and falling prices, whilst also benefiting from the use of leverage.
In order to place your first trade, follow these steps:
1. Open a Trade.MT5 account with Admirals
2. Download the MetaTrader 5 trading platform
3. Open your trading platform and log in
4. Press Control + U to bring up the ‘Symbols’ window. Here, locate the instrument you wish to trade and select ‘Show Symbol’ and ‘OK’
Depicted: Admirals MetaTrader 5 - Symbols
5. Locate the symbol in the ‘Market Watch’ window, right click on it and press ‘Chart Window’ in order to open the relevant price chart
6. In order to place a trade, right click anywhere on the price chart, select ‘Trading’ and ‘New Order’
Depicted: Admirals MetaTrader 5 - #SGOL ETF Daily Chart - New Order. Date Range: 21 November 2018 - 15 April 2021. Date Captured: 15 April 2021. Past performance is not necessarily an indication of future performance.
Trade CFDs with Admirals
With a Trade.MT5 account from Admirals, you can trade CFDs on gold and a wide variety of other financial instruments! Click the banner below to find out more and open an account today!
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.