Could 2020 be the year of gold? We think it just might be. After all, gold is experiencing a 7 year high. So from our end, it is pretty safe to say we are in for a great year. If this isn’t motivation enough, let’s remember that when dips in the market occur people lose faith in their investments. When this happens, investors will often seek out names they trust. Gold has always held had a history of being worth something. That means that as an investment, gold is looking like a pretty safe place to keep your money. But what about investing in a Gold ETF?
What is an ETF?
First things first. Before we start investing, what exactly is an ETF? The acronym itself stands for an exchange-traded fund. These funds are representative of a group of assets such as stocks, crypto or precious metals and often track an underlying index. You can then purchase or trade an ETF on an exchange just like a stock. Rather than purchasing the asset itself, an ETF does not require large investment funds to start.
More specifically, a gold ETF is a fund backed by gold. Therefore, investors earn profits from the price changes of gold, which is likely indicated by a representative gold index. However, investors don’t actually own any of the gold bars (also referred to as gold bullion).
If you purchase a gold ETF, you are actually purchasing a contract that is backed by gold. This means that when you trade your gold ETF in you do not receive gold. Rather, you receive the cash equivalent of the gold.
Investing in Gold ETFs
Buying and selling ETFs is probably the easiest step in the entire process. To begin, all you need to do is purchase shares on the stock exchange. You can then hold them in a custody account for securities. Once the price increases you are then able to sell your shares when the price is good for you.
If all of these concepts still seem new to you, don’t stress. There are online stockbrokers and personal dealers who can help you determine which ETFs you should be investing in. They can also help you to determine what percentage of your portfolio these should make up.
Consider the right investments for you
When considering ETFs, each investor must consider a couple of key features. Some of these features include the price, the amount traded, how influential each trader is on the price, the cost of each share and the structure of the ETF.
To assess the cost consider the expense ratio associated with the ETF. The larger the ETF the lower the costs will be to buy and sell on the stock exchange. This is because smaller ETFs have to cover operational expenses through the selling of fewer stocks. Therefore, each purchase will need to absorb these costs.
In the case of gold ETF’s consider that the price of the ETF will not necessarily reflect the prices of the commodity. For example, if there is a worker strike or something that impacts the ability to mine gold at a company-specific level then the prices of your ETF and the price of gold may not move in the same direction.
Determining a “Golden ETF”
When selecting which gold ETFs we should be investing in in the new year, we narrowed it down to a couple of key indicators that should determine the good from the gold. The first area for consideration is the fund size. While the exact threshold is debated, consider that when the ETF is of a certain size it is more efficient and will be more liable to its shareholders.
The second area we should consider is how long the fund has been around. Again there is no minimum, but keep in mind it is easier to predict the success of your investment if you have more historical data to analyze.
For someone to manage your ETF for you, you will also have to pay an annual fee. This fee covers anything from the operational costs to the marketing costs. Knowing your net expense ratio can help you compare the associated fees for each investment.
Finally, consider the liquidity of each ETF or how quickly you can sell an investment at market value or how easily you can trade your ETF on the exchange. You will want an ETF that has a high liquidity rating.
Our Picks for 2020
Okay traders, *drumroll please* here are our recommendations for the new year. Since gold started the year off well, we have included some of our top picks for gold ETFs that have the potential to make you some money in 2020.
GLD – SPDR Gold Trust ETF
This is likely one of the “classic” picks and has likely been a top choice for most investors. Denoted by GLD, this ETF is the largest fund that invests in gold and has underlying assets of gold bullion. The main deterrent from investing in this ETF is the expense ratio which is slightly higher than other products at 0.40%. Despite this cost, GLD consistently follows the spot (current) prices of gold.
For some background, this ETF continues to hold it’s gold bars in a London vault. SPDR Gold Trust is traded at such high volumes (7 million shares per day) that the bid / ask spread is minimal. The smaller the difference, the greater the liquidity. Which as we outlined above is an important factor in a good ETF investment. Additionally, the ETF itself has also resulted in a total return of 230% since it was released to the public. This is a track record we don’t mind jumping on board with.
The history states this is a good pick; further evident by the impressive 44 billion in net assets. However, it’s expense ratio has since been viewed as higher than some of the comparable ETFs.
SGOL – Aberdeen Standard Physical Swiss Gold Shares ETF
If trust and security are values that you choose to invest by, we would suggest SGOL Aberdeen Standard. The assets for this ETF are held in a Swiss vault and audited twice a year to ensure that the company is holding exactly what they say they do. If you still don’t trust this Swiss vault, then have comfort in knowing that the serial numbers of each gold bar are posted by the company.
In addition to the fact these vaults are held outside of the United States and London, another selling feature is the more reasonable expense ratio. You will likely be a little happier to know that there is an option with a slightly more reasonable expense ratio. At 0.17%, we would like to point out this is a much more competitive rate than that of GLD.
Like other gold ETF’s the fund is equivalent to an investment into gold but is not equivalent to the hassles and expenses of actually owning the gold commodity. Therefore, while the liquidity is questionable (you may have some difficulty selling), have some peace of mind that your investment is actually backed by gold.
IAU – iShares COMEX Gold Trust ETF
A great alternative to the well-trusted GLD is IAU, which is backed by gold owned by JP Morgan Chase in London. Their gold bullion is held in vaults across the globe. We trust this one just the same as GLD for it’s $18 Billion in assets and 20 million shares traded daily.
While it is smaller than GLD, we would also like to point out the lower expense ratio of 0.25%. Since this rate is 15% lower than GLD, we suggest that this is enough to give you some nice savings in the long run. Despite it’s lower amount of assets investors can still trade confidently knowing they are not sacrificing much in terms of liquidity. That makes IAU a great addition to any investment portfolio and slightly more appealing from a cost perspective.
PMGold – The Perth Mint Physical Gold ETF
This might be considered somewhat of a wild card pick due to its newer place on the market. We know this was one of the criteria we gave you too look for. So, what is it about this Australian ETF that lets us take this gamble? This ETF is great as it backs your investment with gold bars held in Perth. Additionally, the ETF has assets of 140M and is relatively cheap to invest in. This is great if you are new to this scene and don’t want to divulge your life savings just yet.
The costs are also lower than most ETFs at a low 0.15%. What we really like about this ETF is that shares can be exchanged for physical gold bullion. Although at certain quantities, this may not be the smartest trade. PMGold is available on the Australian stock exchange and has 275 million in assets.
PMGold is the only gold product on the ASX that has a government guarantee on investor holdings. The ETF also has favourable liquidity.
BAR – GraniteShares Gold Trust
BAR shares like other gold ETFs are backed by gold that is stored in vaults in London and is managed by ICBC Standard Bank. We really like this trust since it feels a little more secure than your average gold ETF. The great thing about this ETF is that it is more secure since those that manage the fund can’t loan out the gold. The fund also posts a daily list of the assets that are kept on site.
However, this is a newer ETF that was created on August 31, 2017. While this could be a deterrent, this ETF has a low expense ratio and it committed to maintaining these same low prices. GraniteShares manages 602.9 million in assets and trades an average volume of 184,000 shares each day.
Play it Smart
Okay, gold is good but remember that purchasing a gold ETF should only be a part of a larger and more diversified strategy. This is where crypto comes in. Since gold ETFs rely on the price of gold, a dip in gold could be detrimental if that’s what you have primarily invested in. To protect yourself from these uncertainties consider that it is important to invest in different assets and industries to whether out short-term dips in the market. This might include a possible Ethereum ETF.
Like any financial advice, we also urge you to get a second opinion after you hear our recommendations. Just so you know exactly what you are getting yourself into.