Since time immemorial, human civilization has held a special affinity for yellow metal. This is evident in the fact that it has been considered a safe-haven when times are uncertain. It is considered auspicious by many cultures and is a great investment choice. To determine if you should add some sheen to the portfolio, first you need to understand your motivation. Do you want to keep this precious metal for a long term goal such as your child’s wedding? Or do you just want exposure because of its unique appeal?
investing in Gold ETFs can be a better option than keeping it in physical form if you want to accumulate gold over the long-term. You will need to pay for its upkeep over time. There are many disadvantages to physical gold investment, including security concerns and additional costs. Although the physical form of precious metal may appear very liquid, you could lose some of its value if you try to exchange jewellery for it due to the inherent making fees. If you don’t sell your precious metal to someone trusted, there are high chances that you will be cheated. ETF investments offer a better alternative to yellow metal ownership in physical form.
Gold ETFs invests in bullion with 99.5% purity, and tracks the price movements of the physical metal. They are listed on an exchange and offer liquidity of the highest quality. Your holdings can be bought or sold at any hour of the day. ETF investing is different from owning physical units. You won’t receive physical gold if you invest in these ETFs. However, such ETFs allow you to participate in the price rise of the metal. You can also sell your holdings anytime to purchase golden items of the same worth if you need them.
You could also invest in Gold-related ETFs, which invest in stocks of companies involved with the mining, fabrication and distribution of this metal. These ETFs don’t allow you to buy physical gold units, but instead invest in the stocks of companies involved in gold-related activities. Although these stocks move with physical gold prices, they are stocks and can be subject to the same volatility as any stock. ETFs that are Gold-related tend to be volatile than those we have already discussed.
Another option is to invest via gold mutual funds which invest in stocks of companies involved with mining, processing and distribution of this precious metal. These mutual funds’ performance is affected by the stock price movements of these companies. These Mutual Funds are also more volatile than Gold ETFs, the same reason that Gold-related ETFs can be. Gold mutual funds, however, are actively managed and not passively managed like Gold-related ETFs. Because the manager of these mutual funds uses his expertise to make active calls to purchase better-performing stocks and to sell those that are underperforming, they are more likely than Gold-related ETFs to generate a higher long-term return. In the case of an ETF that is Gold-related and mimics an index, all stocks are included. ETFs are more cost-efficient than actively managed mutual funds. ETFs are therefore more cost-effective.
ETFs can also be more tax-efficient than mutual funds because they are passively managed, and therefore have lower portfolio turnover. Actively managed mutual funds require that the manager of the fund constantly buys and sells stocks in order to generate alpha, or extra returns over its benchmark. The portfolio’s churn attracts more capital gains tax, which can affect the fund’s return. Mutual funds can be a great way to gain exposure in this asset category if you’re comfortable taking on additional risk. Gold-related ETFs can be a better choice for those with low to moderate risk appetites. They simply replicate a market index and offer great diversification. If you want to hold gold for the long-term, however, you should consider pure Gold ETFs. These ETFs give you access to bullion and can be converted to physical gold at any time.