Is a Gold ETF a Good Investment?

Portfolio diversification is a key consideration for many investors. During a market downturn, like the one we witnessed throughout 2020 due to the global pandemic, many investors turned to gold. Other precious metals also witnessed healthy demand, but gold is generally seen as a safe asset class that is used to hedge market risks. The price of gold rose steadily throughout 2020 and eventually reached its highest point in August. However, many investors want to consider alternatives to buying physical gold. This can have the added advantage of further diversification for your investment portfolio.

Is a Gold ETF a Good Investment?
Physical gold avoids counterparty risk, but gold ETFs have certain advantages too.

What are gold ETFs?

A Gold ETF, otherwise known as an Exchange Traded Fund, is essentially a mutual fund that invests in gold. The fund may consider diverse routes of gold investments. These may not be limited to physical gold alone. Many ETFs invest in gold mining stocks, gold manufacturing companies and other gold-related investments. Of course, the fund would also invest in gold bars, coins and other types of physical gold. The fund can also invest in other forms of paper gold, like government bonds. These decisions are made by the fund manager and his team, who can acquire better margins in the market as an institutional investor. Retail investors would generally not have the opportunity to acquire gold at these prices


Advantages of investing in gold ETFs

Buying a gold ETF can be a good investment to provide a safe haven element to your overall portfolio. The value of the ETF should rise when stock markets fall, providing a sound hedge against market downturns. As an electronic investment, it benefits from efficient buying and selling margins, but also poses additional counterparty risks that coins and bars do not.


Additionally, a gold ETF may be able to provide you with some additional benefits, listed below:


  • The fund provides a hedge against other market forces like inflation, currency devaluation and fluctuation in the currency markets.


  • Since gold ETFs are part of a regulated marketplace, you need not worry about local price fluctuations.


  • Anybody can invest in the fund during the operating hours of the stock exchanges. One need not worry about bargaining with gold dealers about premiums and price differences.


  • As an investor, you can use your gold ETFs as security collateral for obtaining loans from financial institutions.


  • Investments are simpler to make, and you need not worry about the risk of theft, paying locker charges, insurance costs or the costs associated with storing your gold securely.


  • Since the price of gold is not subject to large market fluctuations, investments in gold ETFs can stabilise your returns, even if equity investments are performing poorly.
Is a Gold ETF a Good Investment?
Gold ETFs can provide further diversification to an investor’s portfolio

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Disadvantages of gold ETFs

  • Counterparty risks – these are risks generally associated with any paper investments. If the fund or the company performs poorly, the value of your investments can erode quickly. So, it is a third party risk associated with your investments. When you buy gold in its physical form, you take control of the asset and these risks are non-existent
  • Your gold ETF investments can attract long-term Capital Gains Tax (CGT). After a year, you may be liable for paying certain taxes, however, in the UK, most investment-grade gold can be bought CGT free.
  • When investing in a gold ETF, you may need to pay certain brokerage charges. It’s important to shop around and find a good fund that levies minimal charges

Call us to find out more about gold investments

Physical Gold is one of the most reputed gold dealers in the country and our advisory team can assist you in making the best gold investments. Call us today on (020) 7060 9992 or reach out to us online via our website.



Image credits: hamiltonleen and Marco Verch

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