People have found gold alluring for thousands of years. The precious metal has served as currency, is used to make jewelry, and is a store of value. During times of high inflation, investors use the metal as a hedge. The commodity is an excellent way to diversify a portfolio because it is stable and offers a safe haven against market volatility. Current China and India gold demand illustrate the popularity of the metal.
But of course, you already know all of that. The only question is how to put it in your portfolio — and what strategy to use. This article will discuss one specific method — the gold ETF.
Owning this precious metal in its physical form can be inconvenient for obvious reasons. Coin premiums are often high and storage frequently incurs additional expense. A gold ETF, or exchange-traded fund, is a more convenient investment tool. It tracks the price of the precious metal, which is its underlying asset. An ETF is similar to an index mutual fund but more flexible because it can be traded throughout the day, sold short, and purchased on margin.
Three types of ETFs track the performance of the golden metal. A gold-backed ETF owns bullion to back the shares, with each share representing a fractional interest in the trust. Investors own ETF shares, not the physical metal. The second type tracks the performance of the metal using futures and options contracts. The final type is comprised of stock of mining companies or other organizations associated with the metal.
Traditionally, only the wealthiest investors could trade in this precious metal. With the creation of ETFs, smaller investors can now enter this market. These funds are more affordable, convenient to buy and sell, and very liquid. Here is a list of the largest golden ETFs and some information about notable performances thus far in 2012.
1. SPRD Gold Shares (GLD) is the largest gold-backed ETF, with approximately $63 billion in assets. For a brief time in August 2011, it was the largest global ETF. This trust holds more physical metal reserves than some nations. The price of each share is approximately 1/10 the price of one ounce of the metal. Since 2012 began, this fund has provided a nearly 14 percent return.
2. Market Vectors Gold Miners ETF (GDX) has assets of approximately $7.2 billion and a 0.55 percent expense ratio
3. iShares COMEX Gold Trust (IAU)- with $8 billion in assets, this fund is another analyst favorite. The price of each share represents approximately 1/100th of an ounce of the precious metal. Analysts like the cost-effectiveness, due to expenses of just 0.25 percent per year, and the 2012 YTD return of 13.85 percent.
4. Junior Gold Miners ETF (GDXJ)- $2.4 billion in assets and a 0.60 percent expense ratio
5. ETFS Physical Swiss Gold Shares (SGOL)- with only $1.8 billion in assets, this is one of the smaller ETFs but it is highly recommended by many analysts. It performed very well in 2011 and is appealing because its holdings are located in secure vaults within Switzerland. Its 0.39 percent annual expense ratio makes it the lowest priced ETF on this list.
6. PowerShares DB Gold Double Long ETN (DGP) is technically not an ETF but its $853 million in assets put it on the list. An ETN, or exchange-traded note, is an alternative way to track an index. This investment product is issued as a senior debt note by a major bank or other provider. The PowerShares ETN has a 0.75 percent expense ratio.
7. DB Gold Fund (DGL)- $262 million in assets, 0.54 percent expense ratio
8. Ultra Gold (UGL)- $254 million in assets, 0.95 percent expense ratio
9. UltraShort Gold (UGL)- $80 million in assets, 0.95 percent expense ratio
10. ETFS Physical Asian Gold Shares (AGOL)- with $5 million in assets and a 0.39 percent expense ratio, this is the little ETF that could. It was ranked the fourth best precious metals ETF as of January 31.
Are gold ETFs a good investment? It really depends. I’ll be writing more about this in the future and how you can — if you decide you want paper gold at all — work it into a well-balanced and well-diversified portfolio. Remember to also check out our gold mutual funds article.
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