What are Gold ETFs and are they a good investment?

It seems the new vogue in gold investments are Gold ETFs, but what are they exactly and is it a good idea to begin exploring such an option?

The investment game comes in many forms. It can be small unexpected moneymakers, like Pokemon cards, sneakers and Funko Pops, to the traditional forms of investments like real-estate. 

However, there’s been one investment throughout recorded history that exists until today: Gold. It has been shown throughout history to counter the effects of inflation and recession, with many gold owners being saved by the gold they invest before hard times hit.

Both developing and agrarian economies have used gold as a kind of money. In fact, the gold standard has long been a sustaining currency throughout history, with the application of gold being prominent in the time of great Muslim empires. In modern settings, Islamic Finance has seen further development in countries like Malaysia with the launch of a Shariah-compliant Gold Exchange traded Fund (ETF).

Related: Halal Stocks vs Halal Mutual Funds

What are Gold ETFs?

An ETF is an exchange traded fund which are similar to, and traded on exchange similar to, individual stocks. A Gold ETF has only one principal asset: Gold. Technically, they are funds that hold gold derivative contracts that are backed by gold. You may own a gold ETF, but it does not mean you hold any physical gold.

Gold ETFs are a form of information. Owning gold ETFs enables the owner to track, understand and predict the movement and prices of gold.

Buying gold jewellery is termed as a form of investment because the price of gold is known to appreciate over time. Gold can be sold at a higher price once it has reached a high market price. However, buying gold also comes with additional charges, as the buyer has to pay for the making charges as well. 

Additionally, once a customer purchases gold jewellery, the responsibility for keeping it safe and secure falls solely on the buyer, and there is a great risk involved with storing a sizable sum of money. Hence, most of the problems of keeping physical gold have been solved after introducing gold ETFs.

How does Gold ETFs work?

Gold ETFs follow the index price of the metal. Due to the fact that real gold underpins the Gold ETF, each unit is exceedingly pure and equal to one gramme of gold. Gold exchange-traded funds (ETFs) invest in and monitor domestic gold prices.

While the cost of gold jewellery varies by nation, you can typically trade gold ETFs at the same cost. When buying or selling gold, there is a brokerage charge as well as minimal fund management fees.

Benefits of investing in Gold ETFs

Due to their ease of trading and lack of necessity for storage owing to theft, gold ETFs are growing in popularity. Benefits include:

Practical Trading

The easiest way to trade in gold ETFs is through your broker on the stock exchange, just as you would do with stocks. The minimum purchase amount for a gold ETF is just one unit, which is equal to one gramme of gold.

Liquidity

Exchange-traded funds for gold are traded on stock exchanges and are very liquid since you can convert them to cash whenever you like. You can sell them as soon as you buy them because there is no lock-in time for them.

Cost-effective

There is no load for purchasing or disposing of units in gold ETFs listed on the stock exchange because there is no entry or exit system. The brokerage fee can be 0.5% or less, and the expense ratio for gold can be 1% or less.

Instantaneous Trading

On the stock exchange, gold rates are available to the public for access. What’s more, anyone can rapidly examine the gold prices for the day or a certain hour before trading in Gold ETFs.

Well-diversified

Your gold ETFs may be a great addition to your portfolio of investments. A change in portfolio offers you a far larger return during uncertain market situations by reducing market risks.

A sound investment

Because they are often regulated and actual gold of similar value backs each unit, gold ETFs are secure investments. Additionally, gold funds keep their real gold in the care of the gold custodian.

Low risk

For investors who want to enter the gold market with low investment risks, the gold ETF is one of the most practical, simple, and adaptable forms of investment because gold prices don’t exhibit as much market flexibility as stock prices do.

Challenges of investing in Gold ETFs

Gold ETFs can be quite pricey.

While free trades are generally considered common practice in the industry, cost ratios for ETFs are charged as a percentage of your overall investment. You would incur a yearly expense of $25 if you put $10,000 into an ETF with a 0.25% expense ratio. Expense ratios for gold ETFs are frequently higher than for other well-known index products like the S&P 500.

There is also the risk of potential counterparty.

The danger you take when you rely on someone else to make sure your investment is adequately secured, handled, and insured is another problem with being denied access to actual gold despite your investment. ETFs are also managed by a number of individuals, which only raises the possibility that something will go wrong with your investment.

Are Gold ETFs a good investment?

Despite having some shortcomings, Gold ETFs can be a great way for investors to accumulate gold over a period of time, as gold can be purchased in small quantities. Due to this, investors can plan out when to buy gold in a way that benefits them in the future. Say an investor’s children are getting married, ETFs can be a good indicator of when the gold needed for that marriage can be procured.

Again, investors wishing to diversify their portfolios in the gold market might consider gold ETFs. Due to the fact that the invested funds are placed in 99.5% pure gold bullion, it is a very low-risk investment option. It’s an option for those who wish to invest in gold but do not want to maintain physical gold on hand at added cost.

ETFs, being digital, also have no risk of theft or the added cost of storage. Real gold comes with physical storage cost, while ETFs do not. When the investor does need physical gold, they can just exchange the ETFs in multiples of 1 kilogram units of 0.995 purity.

Gold ETFs can be a relief in terms of tax. No sales tax, VATs or securities transaction tax are applicable on gold ETFs. Also, as they are traded like stocks on the exchange, they’re eligible for long-term capital gains after one year. This is unlike physical gold which is only eligible after three years.

Finally, unlike real gold coins and bars which jewellers only offer exchanges and not buybacks, gold ETFs are easier to exchange around the world, with their prices being transparent if one wishes to do so.

Ultimately, Gold ETFs can be potential mediums for low risk gains and diversification strategies for investors looking to expand their portfolios. It’s important that we consider the pros and cons of each asset class, doing due diligence before venturing into new opportunities.