ETFs vs physical gold, which is the better option for me? Which benefits does each offer, that I should not miss out on? What do I need to know before picking either? Welcome to yet another interesting post about ETFs and physical gold, which I hope will enable you to make a more informed decision by the time you’re getting to the end. Read on to discover which is better.
Gold has for thousands of years been valued as a currency, a valuable commodity, as well as an investment. Today, it is gaining popularity owing to its capability to hedge investors’ investments against the weakening of the dollar, inflation, and deflation. It is also perceived as a safe haven during economically challenging times, such as when the stock market is crashing.
The present-day gold market is highly liquid and offers several approaches through which investors can gain exposure to the benefits that this precious metal has to offer, including physical gold., and exchange-traded funds (ETFs).
Physical gold is known for providing the most direct exposure to the benefits of gold. In bulk form, physical gold is known as bullion, which is often cast into gold bars or coins. The value of gold bullion is usually based on its purity and mass, not on its monetary face value. Even though you come across a gold coin that’s issued with its monetary face value, you should know that its market value is tied to the value of its contents.
Investors who prefer gaining exposure to gold through purchasing physical gold can get their gold bars or coins from:
- Government Mints
- Private mints
- Precious metal dealers
One thing you should know before heading out to purchase your gold is that you can find the same item at different prices. It is, as such, very important to do your research, to establish which is the best deal for you.
Also note that the ownership of physical gold comes with several costs, including:
- Transaction charges
Investors who are making small gold purchases can also end up paying extra money in the form of processing fees and small lot fees. These costs will in most cases not affect someone who is trying to invest a small portion of their investment funds in gold, but will in one way or another become prohibitive for the investors who are seeking to gain more exposure to gold.
Unlike physical gold, gold ETFs can be bought in the same manner as shares on stock exchanges. ETFs make it possible for investors to gain exposure to gold while avoiding costs that are tied to markups, storage, and security risks. Unfortunately, an investor may end up losing a percentage of the value of their investment each year to the specific fund’s expense ratio.
An expense ratio is simply the recurring annual fee that is charged by funds to meet the management costs, as well as the administrative costs. In the U.S. for instance, the largest gold ETF – SPDR Gold Share ETF- has an annual expense ratio of 0.40%. This means that if you are an investor who has an investment of $10,000 in those ETFs, that you will end up paying $4000 in fees per year.
Investors also have to pay a commission as they buy or sell ETFs. Whereas most of the commissions charged online are less than $10, the commissions can add up quickly if you are an active trader. If you’re relying on a brokerage service, you can expect higher commissions, of more than $25 per trade for the automated phone orders, as well as the special order types.
To address the investors’ concerns regarding the high commission rates, some brokerages have opted to offer commission-free trading for certain ETF suites. You can, as such, do your research to establish whether the gold ETF you are interested in can be traded for free on a brokerage platform.
The current day market has a wide variety of gold-specific ETFs, which include inverse and leveraged ETFs. One thing you should keep in mind is that you do not own physical gold simply because you own physically backed ETFs. This means that you cannot redeem or sell your ETFs for gold.
ETFs vs. Physical Gold- which is better?
Now that we have a basic understanding of what ETF and physical gold investments entail, we can now move to the part where we get to decide which of the two is the better option. For starters, it is good to make it clear that a person’s choice of investment depends on their financial objectives. If your choice of investment does not align with your financial objectives, then you are highly likely to end up regretting your decision.
Most investors are taking up gold investments due to the outstanding benefits that they offer, with regards to stability during economically challenging times. Gold ETFs are, however, more appropriate for investors who are out to make significantly higher returns, while they also shield their investments from the negative forces of the market.
Which of the two asset types would I recommend? Well, I would rather take cover under physical gold, if am interested in gaining exposure to gold. Whereas each of these two assets has its outstanding benefits, I would lean on physical gold, owing to the benefits listed below:
I can take physical possession of the metal
It is very reassuring to know that at the end of the investment period, that I can possess the physical gold.
Whereas physical gold and ETFs offer exposure to the gold market when things go south and the economy crashes, only physical gold will remain standing. It, therefore, offers extra safety, that can otherwise not be found in ETFs. Whenever there are unseen political unrests and economic downturns, only physical gold can be relied upon to offer financial insurance.
Protection against inflation, deflation, and currency devaluation
In the present-day world, these three market forces are playing a significant role in the state of the economy. Without physical gold, you’d only end up suffering massive losses by holding savings in fiat currency, or in the form of paper assets such as ETFs (including gold ETFs).
Freedom and control over your wealth
You can invest gold through a gold IRA (which is a self-directed IRA), to gain total control over your wealth, more so if you are investing for your retirement years. All you need to do is to ensure that you choose the best gold IRA company to work with, and you will have a smooth ride (provided the market favors the increase in the price of gold).
Are you ready to invest in physical gold? Check out the top recommended gold IRA service providers and get started today.
That will be all for this article on ETFs vs. physical gold. I hope you found it helpful, and that you will now make the right decision moving forward. Let me know if you have any questions with regards to today’s topic, and whether you’d require some more advice on gold investments. You can also tell me which of the two investments you’d rather pick, and why.
I wish you well,
Eric, Investor and Team Member at Gold Retired!