An exchange traded fund (ETF) is a commodity traded on a stock exchange, similar to stocks. The difference lies in that an ETF holds its value based on a collection of different assets (stocks, futures, derivatives, debt and more), which can vary widely. While a stock’s value is derived from the company issuing the stock, the value of an ETF is derived from the underlying assets grouped into the ETF.
While you can buy ETFs in any market, special kinds of commodities are grouped into commodity-specific ETFs. That means, ETFs are available that are backed by only one type of asset. Gold ETFs, as the term suggests, are completely backed by gold or the gold industry in some shape or form.
It is important to realize that ETFs are not always backed by gold, and can be backed by financial instruments that deal in gold. When you buy a gold ETF you aren’t buying any actual gold, but you are investing in the economic value of gold, and the value of your ETF is tied to the value of the precious metal itself, in any number of (somewhat confusing) ways.
Why Gold ETFs?
Buying a gold ETF is one way to invest in the staying power of precious metals without physically buying, storing, insuring and assaying gold bullion. Gold ETFs are a liquid asset and are easily bought and sold with few fees. And because you are invested in a larger industry rather than a specific product, you are protected from market fluctuations more than if you had owned gold bars. However, for long-term investments, physical gold may be a safer route because ETFs only protect against short-term fluctuations.
Types of ETFs
If you are interested in ETFs and want to learn more, you should investigate the investment thoroughly before taking the plunge. Check out these popular gold ETFs to see if they are the type of investment you’re looking for:
GLD – SPDR Gold Shares ETF
- Provided by World Gold Trust Services and State Street Global Markets
- Based on: Gold bullion
IAU – iShare COMEX Gold Trust ETF
- Provided by: iShares
- Based on: Price of gold
DGL – PowerShares DB Gold ETF
- Provided by: PowerShares
- Based on: Gold held by the Deutsche Bank Liquid Commodity
How to Get Involved in Gold ETFs
Like any other stock or ETF, commodity or otherwise, all you need to do to invest in a gold ETF is do your research and make a phone call to your broker. Investing in ETFs will include standard brokerage fees. You can also trade gold ETFs through an online brokerage, such as Scottrade and ShareBuilder.
Always remember, no matter how safe the investment: all investments carry some risk. While gold bullion may not have the same returns as a gold ETF, a bar of bullion in your safe deposit box is worth much more than a gold-backed ETF, should the market take a nasty turn.
Always invest prudently.