The idea of a gold ETF was first officially conceptualised by Benchmark Asset Management Company in India when they filed a proposal with the SEBI in May 2002. It was not launched since it did not receive regulatory approval. The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol “GOLD”).
Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars.
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each share, so the amount of gold in each share will gradually decline over time. All gold ETFs in the United States have an annual expense ratio between .25% and .4%.
Gold exchange-traded product
Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of 25 June 2010, physically backed funds held 2,062.6 tonnes of vaulted gold in total for private and institutional investors. Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.
What is a Gold ETF?
A gold exchange traded fund is commodity ETF that consists of only one principle asset, Gold. However, the fund itself consists of gold derivative contracts that are backed by gold. You do not actually own any gold.
Even when you redeem a gold ETF, you do not receive the precious metal in any form. Instead, an investor receives the cash equivalent.
What is the Purpose of a Gold ETF?
The strategy behind a gold ETF is to track and reflect the price of gold. While the assets in the fund are backed by the commodity, the intent is not for an investors to own gold. A gold ETF gives an investor an opportunity to gain exposure to the performance of gold.
What are the Advantages of a Gold ETF?
Gold tends to rise when the dollar is weak, so if your investment portfolio has risk to the dollar’s downside, purchasing a gold ETF may help you hedge that exposure. Selling a gold ETF can help if your exposure is to the upside.
A gold ETF is a commodity exchange traded fund that can be used to hedge gold commodity risk or gain exposure to gold itself. If an investor has risk when the price of gold rises, owning a gold ETF can help reduce risk on that position. Or if after ample research an investor decides to short gold, trading an inverse gold ETF may be a quick way to put on that position.
And while gold is a commodity ETF, it can act as an industry ETF as well. For example, if an investor wants to gain exposure to the gold mining industry, owning a gold ETF may be an investment strategy that can fit his or her portfolio. While there are individual gold-mining stocks like Barrick Gold (ABX) and precious metals indexes like the XAU, a gold ETF may be a simpler or more diverse way to make an investment in the gold mining industry. There are a lot of benefits that come with ETFs and therefore sometimes they are a solid tool to have in one’s investment arsenal.
Gold ETFs can also be applied as a hedge for regional risk or to gain foreign exposure. If a certain country is solely dependent on gold as its main source of income, and investor with risk in that country can short a gold ETF as protection. So if gold drops, the short ETF position will help lessen the loss.
What are the Disadvantages of Gold ETFs?
As I mentioned, if you are seeking to actually own a gold asset, you cannot do so through a gold ETF. At no time do you actually own a gold bar, bullion, or even a ring. Gold ETFs are made up of gold contracts and derivatives and can only be redeemed for cash, never gold itself.
While ETFs have many tax benefits, a gold ETF may be at a disadvantage. In some cases and locations, gold ETFs do not have the same capital gain tax breaks that tradition exchange traded funds have. So before you dive into gold ETFs, understand how they will affect your tax return.