How do I invest in gold ETFs? Are they worth investing in or are there better options when it comes to investing in gold? Welcome to today’s article in which I will take you through the basics of investing in gold ETFs, to equip you with enough knowledge to help you decide whether it is worth trying out, or it is something that should stay away from. Read on to discover more about this topic.
What are Gold ETFs?
Gold ETFs are simply gold exchange-traded funds that present an investor with the opportunity to invest in gold without directly purchasing, storing, or reselling physical gold. Several gold ETFs usually track the price of gold in the market, whereas the others are based on companies based in the gold-mining industry.
As is the case with other types of ETFs, the issuing companies usually purchase stock in the gold-related firms, or they purchase and store the gold bullion by themselves. Investors are then expected to purchase shares in the fund, for which they can expect a price increase or decrease based on the price movements in the gold industry, or with the price movements in the stock value of the underlying company.
Gold has for many years been considered a safe haven investment owing to the fact that its prices usually rise any time that stock prices fall. After having hit a record high price of $2200 in September 2011, following the occurrence of the Great Recession, this precious metal also hit the $2000+ mark in the middle of the 2020 pandemic.
Meanwhile, we have seen investors spend more money to purchase gold ETFs and other types of gold. In the first 5 months of 2021, for instance, $33.7 billion worth of gold ETF shares were purchased, surpassing the previous annual record in 2016, in which $24 billion worth of gold ETFs were purchased.
The 3 step process to invest in gold ETFs
Here are the steps you can follow to purchase shares in a gold ETF:
Find a suitable gold ETF
You can find the most suitable gold ETFs for you by searching on your preferred broker’s website.
Extensively analyze the ETF
There are two things that you should consider before purchasing shares in a gold ETF, which are:
- The Five-Year Returns – a significant number of gold ETFs are usually pegged on the spot prices of gold. This means that the returns should move along with the price of gold.
- Expense Ratio – This refers to the annual fee for the ETF, that is usually deducted from your investment in the fund. The industrial expense ratio average is 0.65%. It is advisable to look for an ETF with a lower expense ratio.
As you do this, there are two very important things that you must know:
- As an average investor, you should not purchase leveraged gold ETFs, since they utilize financial derivatives as well as borrowed money which is used to bet on the future price movements of gold.
- Avoid gold Exchange Traded Notes (or ETNs). These are secured debt obligations; hence you do not own the underlying gold. They also present a greater risk of credit default, which is all the more reason why you should avoid them.
ETFs and ETNs are generally for professional investors and are not very suitable for beginner and intermediate investors who rely on the buy-and-hold strategy.
***If you would like to gain exposure to gold through the buy and hold approach, then you should open a gold IRA and purchase gold bullion instead.
Purchase the gold ETF
You can purchase gold ETFs in the same manner that you would purchase stocks through an online broker. A good approach is to use the dollar-cost averaging method, to maximize your earning potential over time.
Some things you need to know before investing in gold ETFs (or any other type of gold asset)
How gold behaves in bear markets
Gold has managed to hold its reputation as a safe haven during an economic crisis. When wars or calamities break out, or major banks run into difficulties, one of the most conventional strategies for seasoned investors is to purchase gold. Before you commit to spending any money, however, you should do your research on how gold reacts in bear markets.
As much as it is a safe haven, its price/value may not rise instantly during a calamity. During the 2008-2009 financial crisis, for instance, the price of gold generally remained stable (not the best, but way better than the stocks market). Two years down the line, however, its prices went over the roof, helping gold investors recover faster than most stocks investors.
In 2020, however, gold responded very fast to the global pandemic and hit a record high in just a couple of months. This means that gold eventually plays its role as a safe haven, but you should also not put all your eggs in one basket. As a rule of thumb, always diversify your investment portfolio to shield yourself from the downsides of unforeseen events in the global economy.
Know how exactly gold will fit into your investment portfolio
Gold is so far perceived as an “alternative asset”. Investing in it, just like is the case with other alternative assets, is based on speculation. The good thing about gold is that it has its intrinsic value to back its worth and utility.
Beyond that, investors have managed to pick several decades’ worth of data on how the prices and value of this precious metal hold up during a global economic crisis. As already highlighted above, gold is a must-have asset during the global financial crisis. This, however, does not mean that you should invest all your money in gold.
Most alternative-asset strategists will recommend that you invest only about 5% to 20% of your investment funds in gold and other precious metals. The thing about using alternative assets to diversify your investment portfolio is that there should be enough of them allocated to have an impact on your portfolio, other it will beat the purpose of trying to include them in your portfolio in the first place.
Ready to get started with investing in gold? My recommendation is that as a beginner, you should use a buy-and-hold approach, which is best suited for physical gold, as learn the ropes of investing in this industry. Have a look at what the gold IRA companies recommended below have to offer.
Thank you for making it to the end of this article in which we have responded to the question “How do I invest in gold ETFs?”. My hope is that you’ve picked bits of information that will set you in the right path as an investor in this industry. If you have more questions about investing in gold, be sure to drop them in the comments section so that I can get back to you ASAP.
I wish you well,
Eric, Investor and Team Member at Gold Retired!