When the market turns sour, investors tend to use a “flight to safety” strategy. Flight to safety means leaving risky investments, such as stocks, and adding more stable investments to your portfolio, such as high-rated, low-risk bonds. Another “safe” investment that investors tend to add to their portfolios during tough times is gold. Although our economy is no longer tied to the gold standard, many investors still love this asset, especially as a hedge against inflation.
However, stocking up on gold bars like a mini Fort Knox is not the most efficient method of stabilizing your portfolio. There is an alternative to buying physical gold. Before you invest in gold, learn more about the advantages of gold exchange-traded funds (ETFs).
- Gold exchange-traded funds are a way to gain exposure to the price of gold without buying the physical commodity.
- A gold ETF may track a precious metal index, gold assets held in a trust, or even certain companies in a gold-related industry.
- One main advantage of gold ETFs is the simplicity of the transaction.
- You can also use gold ETFs to hedge your downside risk.
What Are Gold ETFs?
Gold commodity exchange-traded funds are a simple way to gain exposure to gold without purchasing actual gold. There are many types of gold ETFs. Some of them consist of futures and derivative contracts that 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, such as mining companies.
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. Instead, 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, without owning a pile of gold coins and bars.
Why Should I Buy a Gold ETF?
One benefit of gold ETFs is the simplicity of the trade. For instance, if you wanted to invest in the gold mining sector, you would have to choose companies in this sector to invest in, and then purchase individual shares of each company.
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 in order to target a certain price.
Paying commissions on each of the many trades necessary for tracking an index on your own will make it harder to achieve your investing goal.
Instead, in the case of a gold ETF, you make one purchase at one price. You'll save on commissions because the gold ETF has bundled all the relevant stocks together in one fund. With one trade, you've gained instant exposure to the price of gold.
Trading Strategies for Gold ETFs
If you are looking for some stable investments in your portfolio, gold might be able to help. 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.
You may also be able to use gold ETFs as a hedge to downside risk for both foreign or industry investments. Are you long a lot of gold mining stocks? You could 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.
Trading options and other derivatives is a technique better suited for more advanced investors.
How to Include Gold ETFs in Your Portfolio
If you’re ready to explore gold and precious metal ETFs for your investment strategy, it's important to thoroughly research your target investments.
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 to your broker or visit your trading app.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.