Many investors buy a gold bullion ETF to capitalize on gold’s price movements. So what is a gold ETF vs. bullion and how does buying an ETF differ from actually buying physical gold?
A gold bullion ETF is simply an exchange traded fund that tracks the price of physical gold. If the price of gold goes up 10%, the ETF will go up the same proportion and if the gold price goes down 10%, again the ETF will follow. Each ETF share normally represents one-tenth of an ounce of gold bullion.
Now before deciding to buy a physical gold ETF, there are a few things you should know about them. Firstly, like all ETFs there is a MER (management expense ratio) involved to cover the costs of managing the fund. Luckily however the fee is typically very low (~0.4%) compared to other types of funds.
Another key point about an ETF gold bullion share is that unlike buying physical gold coins or bars, you don’t actually own physical gold by owning a gold ETF share. Yes, you own shares in gold, but not the gold itself. Is that a problem? Well yes and no. It’s not a problem at all if all you’re wanting to do is profit from price movements in gold. In fact buying a physical gold ETF is perfect for capitalizing on gold price movements since like all ETFs, it’s simply a stock traded on a major stock exchange which can be bought and sold easily. However, if your primary reason for buying gold is to hedge yourself from a large wide-scale monetary crises, you would be wise to consider buying physical gold bullion rather than the ETF, or at least in addition to it.
The reason I say this is because if there was a large scale monetary crises in the US, let alone worldwide, it’s very possible the banking institutions that are controlling these Gold Bullion ETFs could become bankrupt or insolvent. As a result they would likely end up liquidating the ETF and you would end up with no gold bullion and very little cash for your shares, if any.
Now I’m not saying this is likely to happen, but if you’re a gold bug, you have to consider why you are wanting to own gold and I’m sure one of the main reasons is to hedge your risk from fiat currencies.
So now that you understand the distinction between owning gold bullion and owning a gold ETF, here are the main gold bullion ETFs available on the market:
StreetTRACKS SPDR Gold Trust (NYSE: GLD) – By far the most liquid gold ETF available on the US market.
iShares COMEX Gold Trust (NYSE: IAU) – Another good alternative gold ETF investment vehicle.
ETFS Physical Swiss Gold Shares (NYSE: SGOL) – A newly launched (Sept, 2009) gold ETF that distinguishes itself from the others by holding it’s physical gold in Switzerland.