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What Are Gold ETFs and Why Invest in Them?

This article was originally published on ETFTrends.com.

A gold ETF is a type of commodity ETF that allows an individual to invest in gold through an exchange-traded fund (ETF). A gold ETF gives investors exposure to the precious metal as well as the benefits of an ETF wrapper.

Just like investing in physical gold, there are diversification advantages and other reasons to invest in the precious metal itself. However, through an ETF, an investor will gain other distinct advantages as opposed to just gold by itself.

Why Invest in Gold?

Investors will typically use gold as a safe haven asset, particularly when the value of the dollar declines. Furthermore, gold provides a hedge for inflation since its price typically rises in conjunction with consumer prices.

During the Great Depression of the 1930s, gold was also a hedge against deflation. While the price of assets were dropping during this time, the purchasing power of gold rose.

During the financial crisis in 2008, the price of gold increased sharply while faith in U.S. equities was languishing. In essence, gold has proven to withstand times of geopolitical and economic uncertainty.

Furthermore, the value of gold has risen steadily over the years.

What Are Gold ETFs and Why Invest in Them

Why Use Gold ETFs?

Precious metals like gold offer investors an alternative to divest their holdings. Like other commodities, gold will march to the beat of its own drum compared to the broader market.

Due to this negative correlation, large downturns in the broad market may not affect commodities. By investing in a gold ETF versus actual gold, investors can also reap the benefits of an ETF like its tax efficiency.

Gold ETFs can be bought and sold freely via an exchange when compared to physical gold. As such, investors can utilize the hedging properties of gold without having to actually own and store the asset like they would with physical gold.

A gold ETF is also less susceptible to the price fluctuations compared to owning gold itself. Furthermore, an inverse ETF in gold gives investors more flexibility if they think the price of gold will go down.

What Types of Gold ETFs are Available?

Not all gold ETFs are similar as each can employ a different strategy. For example, some ETFs may participate in gold mining as opposed to simply investing in the asset itself.

Some ETFs derive their value from owning the physical gold itself and others have forward contracts based on the prices of spot gold. Investors should understand the strategy of the fund prior to allocating capital into a gold ETF.

Examples of Gold ETFs:

For more educational information on ETFs, click here for Education Central.