Gold ETFs: Another Way to Invest in Gold

First we will begin with a definition of Gold ETF (also known as GETF).   ETF is an acronym for “exchange-traded fund.”  But what does that mean?  Well, it is similar to investing in a mutual fund.

What is the difference between a mutual fund and an exchange-traded fund (ETF)?  They are both ways for an investor to inexpensively invest in a group of stocks or other securities. 

When you invest in a mutual fund, the company takes your money, pools it with the other investors’ money, then buys and sells stock to make sure the fund increases in value.  Then you can sell your mutual fund based on its worth at the time, even though it might be comprised of completely different stocks at that point.  When you decide to buy or sell a mutual fund, the trade isn’t executed until the fund’s shares are priced at the end of the trading day.

When you invest in an ETF, you buy a group of securities (which remain the same, unlike a mutual fund) based on how much the group is worth at the time.  Then you can sell that same group of securities whenever you want to, based on how much it is worth at that time.   

Unlike mutual funds, you can buy or sell ETFs throughout the day as prices are continuously updated during the trading day. 

This is a way to enjoy the benefits of investing in gold and gold derivatives but not actually owning any gold itself.  The goal of investing in a Gold ETF is to invest in gold and then sell it for a profit but never having to take possession of the actual product.

Some Gold ETFs buy and physically hold gold bullion while others invest in futures contracts.  Physically-backed Gold ETFs will track the spot price of gold more accurately, since the value of the underlying holdings depends solely on the market price of bullion.

While the Gold ETF is a commodity ETF, there are related industry ETFs as well if you want to invest in the gold mining industry, for example.

The ETF is a relatively new investment vehicle, but a very popular one.   It all began in 1989 with the Toronto Index Participation Fund in Canada.  In 1993 it appeared in the U.S. as the Standard & Poor’s Depository Receipts.  In 1999, Asia’s first ETF appeared as the Hong Kong Tracker Fund.  In 2001, Europe’s Euro STOXX 50 ETF launched. 

The first Gold ETF appeared on the Australian Stock Exchange under “Gold Bullion Securities (tickers symbol “GOLD”) on March 2003.  By the end of 2008, there were 747 exchange-traded funds; and the number just keeps growing worldwide.

Some of the better-known Gold ETFs include:  GLD (SPDR Gold Trust) on the NYSE (gold bullion);  IAU (iShares COMEX Gold Trust) on the NYSE (gold bullion); DGL (PowerShares DB Gold Fund) on the NYSE (gold futures); and SGOL (ETFS Physical Swiss Gold) on the NYSE (gold bullion).

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