During the pandemic, many investors have taken to seeking out reliable assets outside of stock exchanges. One of these assets, as we’ve mentioned, is gold. As has happened before during financial collapses, the stability of gold proved to be a draw for investors looking to protect their wealth. And the precious metal did what it does best: It stayed strong, welcomed nervous investors fleeing other markets, and gained value even as so many other popular assets dropped off.
As appealing as gold has been and continues to be this year though, there are some investors who are hesitant to buy a physical commodity directly. It’s a different sort of arrangement than purchasing stocks, and for some it can be just unusual enough to avoid. As an alternative, some of these investors wind up turning to gold ETFs.
Given the present value (and frankly, trendiness) of gold this year, we thought we’d go over what the specific appeal of ETFs is for some investors.
Diversification is something that’s often mentioned as one of the pros of ETF trading more generally. Buying into ETFs can give a trader additional assets beyond ordinary stock shares, and can help to increase the likelihood of a net gain for a portfolio. Incidentally, this is also why a lot of investors buy gold, even in more ordinary economic times. But gold ETFs are somewhat unique in that they actually provide some degree of diversification within the gold market. Different ETFs might track mining company shares, gold futures, or leveraged prices, meaning investors can technically buy different types of gold ETFs. To be clear, they should all move similarly, and are all tracking the price of gold in one way or another. But there is some slight diversification.
Proven Track Records
When an investor buys gold directly, he or she is relying on skill to know how long to hold it, and when to sell it. It’s difficult to determine the likelihood of success in advance, unless a given investor has extensive history making similar purchases. Where ETFs come into play though, investors can observe past performances and make informed decisions about which funds are most likely to produce returns. Identifying top-performing gold ETFs is a somewhat subjective process. But there’s transparency in trading fees, past success and failure, how big or small a given fund might be, and how specifically it’s tracking gold. With this information at hand, an investor can choose a fund based on logical expectations, which can feel more secure than relying on one’s own ability to make the right decision.
No Storage Fees
This point speaks for itself, but to be clear there are typically storage fees associated with direct gold investment. More often than not, investors are not actually shipped physical gold that they purchase when investing. Instead, the amount of gold in question remains secure in a vault (sometimes all the way across the world). Part of this arrangement means paying a storage fee, and while it’s not usually too burdensome, it’s something many would rather avoid. ETFs don’t involve similar fees, and can thus be cheaper to buy into (though there can be some extra costs involved, depending on the fund).
No Ownership Issues
As stated just now, gold purchased by investors is typically stored safely in a vault somewhere, for a fee. However, there are different ways these arrangements can be made, and they can occasionally cause problems. The goal (and the reality in most cases) is to secure allocated gold storage — which means that the investor in question legally owns the gold he or she buys, and if anything should happen to the buyer or provider, the value of the gold is guaranteed to the investor. Unallocated gold, by contrast, is part of a bank or provider’s liquid reserve, and can be sold to cover a debt, with no protection for the investor. This is something investors can avoid with due diligence (meaning seeking out allocated gold arrangements). But there are no issues of this kind associated with ETFs.
Some would also argue that ETFs are just simpler to trade. Buying and selling gold directly is actually quite straightforward once an investor finds a suitable provider and gets the hang of things. But particularly for investors who are used to stocks and other traditional assets, buying into an ETF will likely feel more comfortable and familiar.
In the end, gold ETFs are neither definitively better nor worse than traditional gold investment. Choosing one or the other is largely a matter of personal preference and comfort. With gold looking as trendy as it has in years however, it’s worth considering the points above as some of the reasons that many do opt for ETFs.