When the market turns sour, investors tend to initiate a “flight to safety” strategy. Flight to safety means leaving risky investments like stocks and adding more stable investments to portfolios like high-rated, low-risk bonds. Another “safe” investment that investors tend to add to their portfolios during times of duress is gold since it is the theoretical staple of our economy.
However, stocking up gold bars in your attic like a mini-Fort Knox, might not be the most efficient method of stabilizing your portfolio. There is an alternative to burying a chest of gold doubloons in the sand. But before you invest in gold, you might want to learn more about.
What Are Gold ETFs?
Enter Gold ETFs. Gold commodity exchange-traded funds are a simple way to expose your investment strategy to the performance of gold, without actually owning any gold products. There are many types of gold ETFs, some of which consist of futures and derivative contracts in order to track the price of gold and gold-related indexes, while others consist of gold assets held in a trust. There are even gold ETFs that track companies in the gold industry.
For example, one of the most popular gold ETFs is GLD, the SPDR Gold Shares ETF. In the case of the SPDR gold ETF, you do not actually own the gold assets, they are held by a trust. The trust issues baskets in exchange for deposits of gold for when the baskets are redeemed. So, you have exposure to the price of gold, but don’t have a pile of gold coins sitting under your desk.
Why Should I Buy a Gold ETF?
The other nice thing about gold ETFs is the simplicity of the trade. If you wanted to invest in the gold mining sector, you would have to make individual purchases of gold mining stocks. And then there is the decision of which companies to choose. And even if you decided to invest in a gold and precious metal index such as the XAU, there is still the challenge of purchasing all the equities in the index basket in order to target a certain price. Complications and commissions make it hard to achieve your investing goal.
However, in the case of a gold ETF, you make one purchase at one price and save on commissions. The gold ETF is already bundled ahead of time. With one trade, you have instant exposure to the price of gold.
When you consider gold ETFs for your portfolio, the nicest attraction is the advantages they create for investors. Capital gains taxes are deferred until the sale of the ETF, giving the funds a huge tax advantage over other investment products like mutual funds.
There is also the benefit of a simpler transaction and lower fees among the many other advantages of ETFs. Not to say that there aren’t some limitations when trading ETFs, but if you understand how they function, ETFs could be a boon to your investment strategy.
As we said, gold is a safe product. If you are looking for some stable investments in your portfolio, with one trade you can purchase a gold ETF and help reduce your downside risk, since gold tends to rise in value as the dollar drops.
There is also the case of using gold ETFs as a hedge to downside risk for both foreign or industry investments. Are you long a lot of gold mining stocks? Sell a gold ETF to hedge your downside. Do you have foreign investments in a country that has gold as its major source of income? This would be another opportunity to sell a gold ETF to protect your downside.
There is also a way to protect your gold ETF investments. If you don’t want to close your ETF positions, but want some short-term protection, trading ETF options may be the way to go.
How to Include Gold ETFs in Your Portfolio
If you’re ready to explore gold and precious metal ETFs for your investment stratagem, I suggest conducting thorough research. Track the performance of gold and watch how some of the major gold ETFs perform. Once you have a handle on the commodity, you can place a call your broker. Here is a list of some of the most popular gold ETFs and ETNs to get you started.