Gold ETF

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What are Gold ETF Funds?

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Investing in gold or other precious metals is very popular these days, but precious metals investing requires special attention to the logistics of the purchase.  Gold ETF funds provide a method for investing in gold that eliminates these issues. The logistics referred to are the problems of insurance, storage, moving, and reselling, along with many others. Here we will clarify what ETF gold funds are, and some of the better ways to trade them.

Firstly however, you should understand what the term ETF means. An ETF is an Exchange Traded Fund, meaning it is traded on the major stock exchanges.  The NYSE, and NASDAQ have ETF’s, but the American Stock Exchange (AMEX) is the primary trading venue for Gold ETF funds. When you buy an ETF, you are typically investing in a conglomerate of companies, rather than a single corporation.

It works like this, the Gold ETF fund will purchase a large amount of gold, maintaining the physical metal in storage. They will then issue shares in baskets, the idea here being that the value of the shares will increase with the price of gold bullion. If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.

What makes this attractive to most buyers is the fact that trading in gold can be done very easily at any time during stock market hours using your online brokerage account. Another thing people like is you don’t have to buy a large amount of gold to invest. Most gold ETF funds have a minimum investment but you can buy in portions of an ounce.  This is really ideal since the price of an ounce of gold these days is not something everyone can afford to purchase.

Some of the more popular venues for buying gold or gold mining companies include the SPDR Gold Trust (GLD), Market Vectors Gold Miners ETF (GDX), and ProShares Ultra Gold (UGL).  Here’s a brief explanation of how these funds work:

SPDR Gold Trust (GLD) was the very first Gold ETF fund and still the most popular. They purchase 400 ounce gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold.

ProShares Ultra Gold (UGL) is for the seasoned investor who is very aggressive and not averse to risk.  Also known as a double gold ETF, it is designed to double the investment return, in other words, if the price of gold increases by 10% the value of the shares should increase by 20%.

Market Vectors Gold Miners fund (GDX) attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it.  Keep in mind, this type of Gold ETF is made of up gold company stocks, thus it tracks the gold stock index, not the gold price index.

Why Follow a Professional?

Now though I’ve provided a good basic overview of Gold ETF funds, if you’re really serious about gold investing I highly recommend you sign up for a reputable gold ETF newsletter with trading alerts. Without the guidance of a professional who specializes in trading gold securities, you’d not only be losing out on a lot of profits but taking on unnecessary risk at the same time.

One of the best gold newsletter and trading alert services out there is TheGoldAndOilGuy. TheGoldandOilGuy is run by Chris Vermeulen, a professional gold and stock trader with a very impressive track record.  Chris is without a doubt one of the best gold ETF traders I know of and what I especially like about his service is that not only does he provide highly profitable trading signals in real time but his whole approach is actually very conservative in nature with limiting your risk being a top priority.

But be warned – if you’re the type of person who has a difficult time following instructions and instead trades on their emotions then please do NOT sign up for this newsletter as you’d only be wasting your time and money.  However if you can exercise discipline and execute trades according to Chris’ calls, you’ll likely be shocked by the consistent gains you can achieve.

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Best Gold ETF to Buy

So what is the best gold ETF to buy that will yield the highest returns possible in a gold bull market?  Do I have a personal favorite ETF gold fund?  Yes actually I do, but before I get too far into which ETF I think is best overall, it’s important to distinguish first what is meant by a Gold ETF as some investors interpret this differently than others.  Essentially there are two different types of Gold ETFs, one is an exchange traded fund that tracks the price of gold, with each share worth 10% of the gold price.  If referring to this type of ETF, I like the SPDR Gold Trust ETF (GLD), mainly because it has the highest average daily volume, and thus greater overall liquidity which allows me to trade the stock much more easily on the market.

The other type of Gold ETF, which is the one I want to focus on for this post is an ETF that contains gold stocks and securities sometimes known as a Gold Stocks ETF.  This type of ETF is obviously very different than one that simply tracks the price of gold.  As such, a gold stocks ETF though influenced by the price of gold, will not directly follow it since you are investing in gold companies and not the price of gold.

So what is the best ETF to buy in terms of those compiled of stocks?  Well, I’m going to cheat here and say that I like two; one that trades on the Canadian market and the other on the US Market.  The Canadian gold ETF I like is iShares CDN Gold Sector Index (XGD.TO).  Traded on the TSX (Toronto Stock Exchange) this gold stocks ETF contains some of the best gold and mining companies in the world including large cap names such as Barrick Gold, Goldcorp, Newmont Mining, Anglogold, Kinross gold, and gold fields.  It also contains some very high growth small cap gold stocks including Aurizon Mines, and Red Back Mining.  Also, with this ETF being priced in Canadian dollars, some might argue you are better protected from a weakening US dollar.  In actuality though, it’s really more of a convenience factor. If you have a Canadian brokerage account, you more than likely want to keep your funds in Canadian currency, particularly for an RRSP account.

The other Gold ETF to buy on the US market is the Market Vectors Gold Miners ETF (NYSE: GDX).  Traded on the New York Stock exchange, it is a very similar exchange traded fund to XGD but actually contains 30 holdings compared to the XGD’s 19, so you actually get a broader exposure to the precious metals sector.

Remember though, you don’t have to buy what I like, in fact it doesn’t really matter in the end which particular ETF gold fund you choose so as long as it has sufficient exposure to the gold sector, has had good past performance (meets or exceeds the gold index), and has a relatively low management expense ratio (MER).