Gold exchange-traded funds (ETF)
What are Gold ETF Funds?
Investing in gold or other precious metals is very popular these days, but precious metals investing requires special attention to the logistics of the purchase. Gold ETF funds provide a method for investing in gold that eliminates these issues. The logistics referred to are the problems of insurance, storage, moving, and reselling, along with many others. Here we will clarify what ETF gold funds are, and some of the better ways to trade them.
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Firstly however, you should understand what the term ETF means. An ETF is an Exchange Traded Fund, meaning it is traded on the major stock exchanges. The NYSE, and NASDAQ have ETF’s, but the American Stock Exchange (AMEX) is the primary trading venue for Gold ETF funds. When you buy an ETF, you are typically investing in a conglomerate of companies, rather than a single corporation.
It works like this, the Gold ETF fund will purchase a large amount of gold, maintaining the physical metal in storage. They will then issue shares in baskets, the idea here being that the value of the shares will increase with the price of gold bullion. If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.
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What makes this attractive to most buyers is the fact that trading in gold can be done very easily at any time during stock market hours using your online brokerage account. Another thing people like is you don’t have to buy a large amount of gold to invest. Most gold ETF funds have a minimum investment but you can buy in portions of an ounce. This is really ideal since the price of an ounce of gold these days is not something everyone can afford to purchase.
Some of the more popular venues for buying gold or gold mining companies include the SPDR Gold Trust (GLD), Market Vectors Gold Miners ETF (GDX), and ProShares Ultra Gold (UGL). Here’s a brief explanation of how these funds work:
SPDR Gold Trust (GLD) was the very first Gold ETF fund and still the most popular. They purchase 400 ounce gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold.
ProShares Ultra Gold (UGL) is for the seasoned investor who is very aggressive and not averse to risk. Also known as a double gold ETF, it is designed to double the investment return, in other words, if the price of gold increases by 10% the value of the shares should increase by 20%.
Market Vectors Gold Miners fund (GDX) attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it. Keep in mind, this type of Gold ETF is made of up gold company stocks, thus it tracks the gold stock index, not the gold price index.
This should provide a good basic overview of Gold ETF funds and how they can be used to invest in precious metals while avoiding excessive fees and unnecessary risk.
In the Indian market the following are a list of Gold ETFs
- SBI Gold ETF
- Gold Benchmark ETF
- UTI Gold ETF
- Kotak Gold ETF
- Reliance Gold ETF
- Quantum Gold ETF
The asset allocation pattern followed by all these Indian funds is more or less on the same pattern as the foreign funds. Some funds like the SBI Gold ETF allocate 10 to 20% of the fund corpus for investing in fixed return bonds and debt intruments. Since the risk is low in these investments they try to ensure the protection of the total corpus funds. Every investor should allocate upto 20% of the total funds towards these Gold ETF. They will act as a hedge against market declines. This is just an indicative figure. Each investor should analyse his risk taking capacity, the purpose of his investments and then take a decision on the amount to be allocated.
Source: inputs from websites of the funds and etfgold.net.
