A complete guide to gold ETFs

Gold ETFs track the value of gold and can be traded on an exchange like shares. Since the underlying asset is gold, a gold ETF represents the metal in a dematerialised form or paper form. A unit of a gold ETF is equivalent to a gram of pure gold. For those who prefer the safety of gold, this ETF is a good alternative, requiring a broking platform and a demat account.

Investing in a gold ETF is a form of passive investment. The price of gold may vary drastically only when the market is reflecting a major economy-wide event. Those who don’t want to track the price of gold in real-time and want to avoid the risks associated with owning physical gold can invest in this avenue.

Things to know before investing in gold ETF

  1. When you buy units of gold ETF, it represents an equivalent amount of high purity physical gold. As long as you have the units, the gold belongs to you but in dematerialised form
  2. It reduces the hassle of holding and moving physical gold. The prices are more transparent than other types of gold investment
  3. Regular audits are conducted to ensure that the funds are well supervised
  4. Be mindful of your expected returns, which may be less than equity. For ETFs, there are annual maintenance charges, fund management fees, etc., involved. These may further reduce returns
  5. You should check the impact cost of gold ETFs by seeing the trading volume. Low volumes can mean a high bid price and low ask price, thereby reducing your returns
  6. You should ensure that NAV tracking errors are low

Pros and cons of investing in gold ETFs

The advantages of a gold ETF are that it helps you diversify your portfolio; the fund is relatively stable, reducing the hassle of storing physical gold. Other advantages include:

  • No entry and exit load.
  • Accepted as collateral for loans
  • Easy to liquidate and trade as they are listed on exchanges
  • Gold ETFs have certain tax benefits

The cons of gold ETFs include low returns, the potential for a high expense ratio and the lack of physical redemption. It also carries a certain amount of market risk.

If you are an investor looking to diversify your portfolio by trading on gold but do not want to own the actual metal, gold ETFs could be a better option for you. However, you need to actively manage your portfolio so that you do not end up exceeding the recommended gold allocation in comparison to your total investments.

Reach out to a financial advisor today to build a robust investment portfolio and invest in gold ETFs that are better suited for your investor profile.