What is an ETF?
A gold ETF is a gold exchange traded fund. That means that it works like a regular stock. You buy it with an offline or online stock broker, like ETrade or AG Edwards. You pay a commission charge to buy it and to sell it just like you would with a stock.
Beware of Sponsor’s Fees
Because gold ETFs are managed by companies, they have to make money. They don’t make money off of trading commissions because those go to the broker. Instead they charge sponsor’s fees. That is a percentage of the total money you put into the ETF. Be sure it is low like 0.25% or so. You don’t want to be paying a large sponsor’s fee or it would be easier to buy gold yourself and hide it.
Understanding Gold ETFs
With gold ETFs, you have to be careful. Some of the ETFs are based on futures while others are based on actual holdings of gold. That means that some ETFs are speculative and might not reflect the actual price of gold, while others basically give you a share of physical owned by them.
For example, iShares Gold Trust (IAU stock ticker) holds gold bullion with millions of ounces of gold held outside of major financial centers like New York, Toronto and London.
Meanwhile, other gold ETFs hold futures on gold, meaning that they are playing the commodities market. For example, PowerShares DB Gold ETF (DGL stock ticker) holds futures based on the Deutsche Bank Liquid Commodity Index. That means that it is supposed to reflect the price of gold, but it might vary a little bit. There are two problems with this approach. The first one is that the sponsor’s fee is higher at 0.75%. That is because it takes a lot more manpower to manage futures to reflect the price of gold than actually holding gold itself. The other problem is that you don’t actually own a share of real gold, but rather you own future contracts which is more of a speculative instrument.
When choosing between the two, I would buy the ETF that holds the gold. For one, the sponsor’s fee is lower and for two you are actually buying ownership of physical gold instead of paper. Who knows what could happen to a gold ETF that just holds paper.
Why Buy an ETF Instead of Buying Gold Directly?
There are a few advantages to buying a gold ETF.
First, you don’t have to worry about storing and hiding your gold. The gold ETFs hold millions of ounces and have security and insurance so nothing is likely to happen to your gold.
Secondly, a gold ETF will be buying gold in bulk and they will be savvy enough to get market prices for it with reasonable commissions. There are a lot of horror stories of people who have purchased their own gold coins or gold bars and have been taken advantage of by dishonest dealers. By buying a gold ETF, you don’t actually have to worry about finding a dealer. You just have to do your online research of the various ETFs.
Gold has been steadily increasing in value over the years. It is wise to invest in gold because as population pressures increase on commodities like gold, the value is likely to increase. Gold is a sure store of value and has been for millenia.