Gold ETFs have become a popular way to trade and invest in gold. But what is a gold ETF and how can gold ETF funds work in your portfolio?
Gold has always been a popular investment and is often used as a hedge in uncertain times and in uneasy markets. But in today’s modern world where trades are executed in milliseconds and investments are traded across the globe the characteristics of gold can cause quite a few headaches for the average investor. How would one quickly and safely purchase, sell, move, store, or insure gold? The gold ETF was created to allow investors to have exposure to the price performance of gold without dealing with the physical and security problems of owning gold itself.
Gold ETF is verbal shorthand for Gold Exchange Traded Fund. An Exchange Traded Fund is precisely what the name suggests, a fund traded on a major stock exchange, like the New York Stock Exchange, the NASDAQ, or the American Stock Exchange. ETFs track an index, a commodity (like gold), or a bundle of assets (think index fund) but can be bought and sold throughout the trading day like a stock. OK, now that you have some background on what an ETF is let’s talk about gold ETFs specifically.
A gold exchange traded fund is designed to track the price of gold. The way this is accomplished can vary greatly from one gold ETF to another. Some gold ETFs actually buy gold bullion, put the gold in storage, and then issue shares to investors. These types of Gold ETFs generally track the spot price of gold quite closely. A difference in these types of gold ETFs that might be of concern to an investor is what country the physical gold is stored in and which bank is custodian for the gold. Other gold ETFs use gold futures contracts to track the gold price. And while these types of gold ETFs can be a great and useful investment tool, and usually track the spot price of gold closely, there are times when the nature of futures contracts can cause a deviation between your ETF and the spot price of gold bullion.
Gold ETFs that might be worth further investigation:
SPDR Spider Gold Trust – Ticker Symbol GLD - The aim of the trust is to reflect the price of gold bullion. The sponsor of the Trust is World Gold Trust Services, LLC. The Bank of New York is the trustee of the Trust. HSBC Bank USA, N.A. serves as the custodian of the Trust’s gold. This ETF trades on the New York Stock Exchange.
ETFS Gold Trust ETF – Ticker Symbol SGOL – Trades on the New York Stock Exchange and is designed to provide investors with a return in line with the spot price of gold minus fees. Gold is held in Zurich, Switzerland. JP Morgan Chase Bank, N.A. serves as custodian of the gold.
iShares COMEX Gold Trust – Ticker Symbol IAU – Trades on the NYSE and seeks to track the price of gold. Gold is stored in vaults in New York, Ontario, and London. BlackRock Asset Management International Inc. is the sponsor of the trust. The Bank of New York Mellon is the trustee of the trust, and JP Morgan Chase Bank, N.A. London branch is the custodian of the trust.
PowerShares DB Gold Fund – Ticker Symbol DGL - Trades on the NYSE and is based on the Deutsche Bank Liquid Commodity Index. This ETF is composed of futures contracts on gold and is intended to reflect the performance of gold.
Gold Leveraged Funds –
ProShares Ultra Gold ETF – Ticker Symbol UGL – Trades on the NYSE and tries to deliver twice the performance of gold bullion in a single day of trading. This fund attempts to get twice the daily price movement of gold by using various financial instruments like swap agreements, forward contracts, future contracts, and option contracts. These types of funds can be quite volatile and are NOT designed for long term buy and hold and are meant to be used more as a trading vehicle. If you are on the wrong side of the trade in this type of ETF you can rapidly lose your capital.
ProShares UltraShort Gold ETF – Ticker Symbol GLL – This ETF trades on the NYSE and is designed to do twice the inverse of the daily price of gold bullion. Again, being on the wrong side of the trade in this type of gold ETF can really hurt your portfolio.
A Word About Gold ETNs
As you delve deeper into the world of gold ETFs you may run across the term exchange traded note or ETN for short. An ETN is a type of unsecured unsubordinated debt security issued by a bank. ETNs were created to try to combine certain aspects of bonds and ETFs. ETNs are traded on major exchanges like ETFs but can also be held to maturity like a bond. Unlike bonds, ETN returns are based upon the performance of a market index (with the issuer of the ETN subtracting certain fees). Basically, ETNs have the same risks that ETFs have but ETNs can also be affected by the credit rating of the issuer – a cut to an issuer’s credit rating could possibly make the value of a ETN drop.