Gold exchange-traded funds (ETFs) are an excellent investment option if you find it inconvenient to buy gold at physical prices or if you want to diversify your portfolio. Gold is considered a safe asset, meaning that its prices are usually not very volatile. Dhanteras, which marks the first day of Diwali in India, is considered conducive to buying gold and silver. Buying gold on auspicious occasions is part of Indian tradition.
Investing in gold can be made in the form of physical gold, sovereign gold bonds, gold ETFs and gold funds. Gold ETFs are basically exchange-traded funds that invest in gold. For some, buying gold exchange-traded funds (ETFs) may seem like a good deal. You are a little exposed to the performance of gold, but without having to organize the receipt or storage of real gold.
How? A gold ETF trades like a stock, generally tracks the price of gold and aims to replicate the performance of gold. There may be more effective ways to buy and hold gold than a gold ETF, ways that don't involve a great deal of counterparty risk and don't operate within the limits of the banking system or the stock market. For example, let's say you want to buy shares in one of the world's largest and most popular gold ETFs, the SPDR Gold Trust (GLD). Investors buy shares in the fund, whose value rises and falls with the underlying price of gold or the value of the company's shares.
While vaults like this exist, gold bars are much more accessible than the average gold owner can imagine. Owning shares in a gold ETF is not the same as owning physical gold, and ETFs cannot reproduce the security offered by physical gold. Gold ETFs allow you to invest in gold without having to worry about the logistics of transporting and storing it. Custodians and sub-custodians, usually banks, are responsible for obtaining and storing the physical gold associated with a gold ETF.
iShares Comex Gold Trust (0.12% of IAU) and SPDR Gold Trust (GLD 0.09%) are two popular gold ETFs with expense ratios of 0.25% and 0.40%, respectively. Some gold ETFs directly track the price of gold, while others invest in companies in the gold mining industry. Chintan Haria, director of product development strategy %26 at ICICI Prudential AMC, said that investors considering buying gold for investment purposes this Diwali can consider gold ETFs. While physical gold can be bought, sold and stored outside the banking system, gold ETFs and the gold associated with them cannot.
As with other types of ETFs, the issuing company buys shares in gold-related companies or buys and stores gold ingots on its own. While gold may have its place in portfolios, here's why gold ETFs may not be the best option for you. Even central banks buy gold coins and ingots, not gold ETFs, to manage risk, promote stability and protect against inflation and the fall of the dollar. Most (but not all) gold ETFs are linked to the spot price of gold, so returns should align with gold price movements.