October 26, 2009

If You Buy Gold then Use an ETF

I'm not really a fan of investing in gold. I don't think its a safe investment and it doesn't perform well over long term periods. Thats my personal opinion on investing in gold. However I can understand the interest in gold for many people so I understand if someone might want to have some of their assets in gold.

If you are going to buy gold then buying an ETF (Exchange Traded Fund) is a good way to go. With the gold ETF you are buying a share of gold assets owned by the ETF. This is an efficient way to buy gold without having to pay a sales markup when you buy or pay a sales fee when you sell. There are however expenses in the ETF fund so you should be aware of those. ETFs have expense fees of around 0.4% to 0.5% level.

I would recommend keeping no more than 10% of your assets in gold. Gold can be a volatile investment and holding more than 10% of your assets in gold could be pretty risky.

Three gold bullion ETFs that you can buy directly are :

SPDR Gold Shares (GLD), iShares COMEX Gold Trust (IAU) and ETFS GOLD TRUST (SGOL)

Benefits to buying gold via an ETF:

Easily bought and sold. Its fairly easy to buy or sell an ETF and you can trade your gold assets on the market quickly. If you bought gold bullion or coins you'd have to physically get the gold and take it to a dealer and possibly shop around multiple dealers to get a good price.
It removes the risk and/or cost of holding physical gold bullion. If you bought some gold coins or bars and held them yourself you'd be running the risk of a burglary or paying the cost to store the gold in a safe deposit box.
Low fees compared to buying physical gold directly. When you buy and sell physical gold you pay fees to do so. I googled "buy gold" and I found a site selling 1 oz. gold coins for about $1,097 today. The price of gold bullion is at $1038. So thats about a 6% markup you're paying to buy the physical gold coin.

There are some drawbacks to be aware of with ETFs:

Be aware of expense ratios.
Buying gold via an ETF does come at a cost. They charge an expense ratio of around 0.5% give or take. This is a 0.5% cut off the top of your return every year.
You can't hold the gold in your hand. If you buy an ETF its an electronic record of your ownership rights. Its not pretty shiny thing you can hold in your hands. Some people enjoy owning gold as a physical object and with an ETF you lose that aspect. But I would caution for people to think about the fact that if you're buying gold because its shiney then thats not a very good investment strategy.

To sum up: If you plan to buy gold as an investment then buying a gold ETF is a good way to go.

No comments:

Post a Comment

Blog Widget by LinkWithin