Which Of These Gold ETFs Is Right For You?

gold bullion

If you talk to a gold “bug” they’ll tell you the only way to invest in gold is by buying the shiny yellow metal. For them, its the truest way to be in gold. However, the quickest and easiest way to gain exposure to the gold market is via the stock market, as in a gold ETF.

Whats the benefit of buying a gold ETF over gold bullion/coins?

  • Fast and easy transactions. Gold ETFs are traded on the stock market, the ability to get in an out of them is as fast as a click on your mouse. When you buy gold bullion, especially in large sums, arranging a transaction could take days or even weeks to complete.
  • The stock market is more competitive. For example, when you’re looking to buy a gold ETF, the difference between what buyers are willing to pay and what sellers are willing to sell, is tight. On the other hand, the price of some gold bullion can fluctuate greatly, as dealers usually charge much more than the actual gold value and offer to buy at much lower prices.

apmex gold

 

apmex gold

Source: APMEX

The above images show the dealer offering to buy the gold bullion for $1,326.30, which is below the spot price, and is selling a one ounce gold bullion coin between $1,388.29 and $1,446.14, depending on which payment method you use. Not the most efficient market to say the least.

And you know what else?

There are gold ETFs that even track the price of gold… pretty darn good. So if you’re okay with trying to profit off the potential spike in gold prices without owning the physical product in your possession, than investing in a Gold ETF is the best way to go.

Gold ETFs That Track Gold

Despite them being traded on the stock market, these ETFs don’t invest in companies, instead they invest in the underlying asset.

SPDR Gold Shares (NYSE: GLD) this ETF invests in gold bullion,  it holds more than 26 million ounces of gold. The funds objective is to replicate the price performance of gold bullion, minus expenses and fees.

The way the ETF is structured allows for baskets to be created and redeemed  based on market demand.

Now, with the price of gold trading well above $1,000 an ounce, the barrier of entry is high for most small investors. On the other hand, buying one share of (NYSE:GLD) is more than ten times cheaper than buying an ounce of gold bullion.

iShares Gold Trust (NYSE: AU) this another ETF that buys and holds physical gold. It owns more than 7 million ounces of gold.

The price of one share of (NYSE:AU) is more than 100 cheaper than buying one ounce of gold bullion. A very attractive feature for those investors who lack the proper funds to invest in gold bullion.

gold bullion

Gold Mining ETF

Instead of buying physical gold, these gold ETFs invest in publicly traded companies that are involved in the production of gold.

VanEck Vectors Gold Miners ETF (NYSE: GDX) this gold ETFs objective is replicate the price and yield performance of the NYSE Area Gold Miners Index, which attempts to reflect the performance of firms in the gold mining industry.

Some of its largest holdings include: Newmont Mining Corp; Barrick Gold Corp; Newcrest Mining Ltd.; Franco-Nevada Corp; and Goldcorp Inc.

In addition to investing in gold miners, the ETF also invests in royalty and streaming companies, like Franco-Nevada Corp (NYSE: FNV).

Now, royalty and streaming companies are not involved in the physical production and mining of gold, instead they act more like a bank, financing mining operations.

The way they make money is by collecting royalties from the production of gold from the companies they invested in. The two main type of royalties are revenue-based and profit-based interest royalties.

The fund is diversified across the gold complex, making it a solid choice for investors looking for a well rounded Gold ETF.

Junior Gold Mining ETFs

Junior mining companies typically don’t generate income from the production of gold. Instead its focus is on exploration.

These types of stocks are high risk/high reward. If they are able explore and “hit gold” than shares of its stock could skyrocket. On the other hand, if they are unable to find any good projects than they might run out of financing and eventually drown in debt.

VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) this ETF tries to replicate the performance of the MVIS Global Junior Gold Miners Index. Its objective is to track the overall performance of small cap companies in the gold and silver mining space.

Some of the funds top holdings include: Evolution Mining Ltd; Kirkland Lake Gold Ltd; Gold Fields Ltd; Yamana Gold Inc; and Northern Star Resources Ltd.

The companies it invests in stretch globally.

gold ETFs

 

Leveraged Gold ETNs

VelocityShares 3X Long ETN (NASDAQ: UGLD) the objective of this exchange traded note is to replicate the performance of the S&P GSCI Gold Index ER by three times.

The note is composed of  gold futures contracts and is intended to correlate with price changes in gold.

VelocityShares 3X Inverse Gold ETN (NASDAQ: DGLD) the objective of this exchange traded note is to inversely replicate the performance of the S&P GSCI Index ER by three times.

Leveraged ETNs are volatile. That said, investors should have a high tolerance for risk if they decide to trade them. Make sure to read the prospectus before you decide to invest.

The Bottom Line

Threats of inflation are rising and investors are regaining interest in gold. That said, the easiest way for an investor to gain exposure to the gold market is through gold ETFs.

You can chose from gold ETFs that invest in physical bullion, or ones that invest in gold companies. For those who have a higher tolerance for risk, look into leveraged gold ETNs. But make sure to read the prospectus before getting involved.

During periods when gold is performing well, gold ETFs that invest in gold stocks tend to perform better. That said, junior mining gold ETFs perform even better during gold bull markets.

Something to consider before making your decision on the right gold ETF. As always, no one will care more about your finances than you. That said, make sure to do your due diligence before  getting involved in any investment.

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