Gold ETF definition
A gold ETF is a type of exchange traded fund (ETF) that is designed to move up and down in price as the market price of gold bullion moves up and down. It is one of the most popular forms of exchange traded commodity (ETC).
How do gold ETFs work?
Gold ETFs work just like any other form of ETF or ETC. They seek to track the price of a benchmark index (in this case, gold) and contain various assets that help them achieve this aim.
The simplest gold ETF, for example, will hold bullion and nothing else. If you bought a share of this fund, you’d be taking ownership of part of that bullion – and the value of your share will therefore closely track the market price of gold. However, gold ETFs can also be more complicated, holding assets like gold futures or stocks in gold-mining companies.
Types of gold ETF
There are lots of different types of ETF, from funds that aim only to track the performance of their underlying index to those that do a lot more – and gold ETFs are no different. Here are a few popular types of gold fund.
Gold miner ETFs
Instead of investing in bullion, a gold miner ETF buys stocks in gold-mining companies. These stocks will tend to move in price as gold’s price moves, but as gold miner ETFs don’t actually hold any gold they will not track its price exactly.
Inverse gold ETFs
An inverse gold ETF, or short gold ETF, aims to move in the opposite direction to the market price of bullion. So if you invest £1000 in inverse gold ETF shares and the gold price drops 5%, your shares should increase in value 5% to £1050 (minus any management fees).
Leveraged gold ETFs
A leveraged gold ETF aims to deliver amplified returns to the price movements of gold – for instance, a double gold ETF will attempt to double any move that spot gold makes. You can also find leveraged inverse gold ETFs, which achieve the same result but to the inverse of gold’s price movement.
Smart beta gold ETFs
Smart beta is a form of investment that aims to outperform its benchmark index by taking more factors into account than a traditional ETF. A smart beta gold ETF might hedge your gold exposure with some equities that are unrelated to the commodity market, for example.
Benefits of a gold ETF
Gold ETFs offer all the benefits of traditional gold investment combined with all the benefits of an ETF. That means:
- Precious metals can be used to diversify your portfolio, or hedge against negative market movements
- Buying and selling them is far easier than taking ownership of physical gold, and there’s no expiries to worry about
- You don’t need huge amounts of capital to invest
- You can sell your investment at any time during the trading day
- They can be used to invest in more than just gold bullion, assets like gold-mining stocks or currencies can also be included
How to buy gold ETFs
Gold ETFs are bought and sold on exchanges, just like equities. So to invest in one, you’ll need a broker that can operate on the exchange for you. Once you’ve chosen a broker and a fund, you simply place an order for however many shares you wish to buy in your chosen gold ETF. Most ETF trades are completed within minutes, and can be processed entirely online.
You can find a huge range of gold ETFs on our ETF screener.