Gold ETF

There are several ways to invest in gold, including investing in gold Exchange Traded Funds (ETFs). This is a digital way of investing in gold without trading in physical gold. We tell you more about how ETFs work, what risks are involved and how ETFs compare to physical gold.
 

How do gold ETFs work?

Gold ETFs are similar to stocks, but they work in a different way. When investing in stocks, you become the owner of a small part of a company. ETFs, on the other hand, track the values of the products they are based on. For this reason, ETFs are also called trackers.  
 
ETFs are passively managed. Active management is done by a fund manager who performs analysis to predict the success of a stock while passive management only looks at the development of the product's value.
 

Physical versus synthetic gold ETFs

There are two different types of gold ETFs: physical and synthetic. In a physical gold ETF, the financial instrument is actually purchased. This is also known as a physical replication. This form of ETF is backed by real gold. 
 
Synthetic gold ETFs are not backed by existing gold. Instead of buying financial instruments, a swap agreement is made with, for example, a bank.
The bank then gets the profits from the investment and pays the buyer of the ETF a fee roughly equivalent to the increase in value. 
 

Risks of investing in gold ETFs

As with all forms of investing, buying gold ETFs has risks. It is a speculative investment that is sensitive to market changes, has additional costs and investors in gold ETFs are dependent on third parties.
 

Additional costs

There are a number of additional costs to consider when investing in ETFs. First, management fees are included in the price of the ETF. Since it is passive management, these costs are minimal compared to stocks with active management. In addition, there are operating and transaction costs that are charged. 
 

Third-party dependency

All ETFs are traded through third-party brokers and firms. This makes you dependent on these parties to safeguard your investment. In addition, providers and managers of ETFs can be more sensitive to market conditions and can be unpredictable.
 

Physical gold versus gold ETFs

Investors can choose to invest in physical gold or gold ETFs (or a combination). There are a number of advantages associated with physical gold that make it a more interesting option for investors than gold ETFs. 
 

Gold as a safe haven

A common statement in gold trading is that gold is a safe haven in times of economic uncertainty. This is said for good reason. Physical gold provides protection against inflation, secures wealth and is tradable worldwide. 
 

Tangible property

Physical gold has the advantage that, like other physical precious metals, it is a unique part of an investment portfolio because it is tangible property. There are no other parties involved in owning gold and it is a long-term investment that offers security. Gold ETFs, on the other hand, are a short-term investment that are more sensitive to changes in the market. 
 
Disclaimer: The Silver Mountain does not provide investment advice and therefore this article should not be considered as such. Past results do not guarantee future results.