Four gold ETFs for simple exposure
Gold ETFs offer an accessible way to protect portfolios during periods of market turbulence. Here are four gold ETFs to consider buying.
Gold exchange-traded funds (ETFs) are a simple, accessible means of gaining exposure to one of the most important commodities.
They can be bought and held in your ISA, and don’t bring any concerns over storage or insurance.
That makes gold ETFs one of the easiest ways for individual investors to invest in gold, or at least gain exposure to gold price movements.
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Most experts recommend holding somewhere between 2% and 10% of your portfolio in gold, given its volatility and the fact that it pays no interest. There are various ways to gain this exposure in your portfolio.
One option is to stock up on jewellery or buy gold bullion, in the form of physical coins or bars. That will give you the reassurance of physical gold, but it can be expensive and there is the worry of storing them safely.
You could also buy shares in gold miners. But keep in mind that mining is a cyclical and volatile business and stocks may fluctuate more than spot prices, meaning you need to pay close attention to company performance as well as platform fees.
Gold ETFs and ETCs: The simple way to invest in gold
Gold ETFs are an alternative. These are, effectively, an exchange-traded product that offers exposure to gold prices.
There are various categories of gold ETFs but there are two main types to consider: gold equity ETFs and gold exchange-traded commodities (ETCs).
Gold ETCs simply track the price of gold itself. Most of these are “physically backed”, meaning that they hold physical gold to underwrite the value of the ETC.
“For investors who want exposure to the gold price itself, a physically backed gold ETC is often the simplest option,” said Lale Akoner, global market strategist at investing platform eToro. “It can be traded through a normal investment account, avoids the storage and insurance costs of holding bars or coins, and usually tracks the spot price more closely than mining shares.
“The trade-off is an ongoing fee, potential tracking difference and reliance on the issuer and custody structure,” Akoner added.
A gold equity ETF is an ETF that holds shares in gold miners. It operates the same way as any other ETF would, and its value changes according to the price of its component stocks.
“A gold-miners ETF offers diversified exposure to mining companies, reducing the company-specific risk of buying one miner,” said Akoner. “Miners can outperform gold because higher prices may lift profits faster than revenues, and some pay dividends.
“However, that sensitivity works both ways,” she continued. “Rising wages, energy costs or capital spending can squeeze margins even when gold is strong. Investors also face management, political, regulatory and operational risks, alongside stock-market volatility.”
ETFs and ETCs trade on stock exchanges throughout the day, meaning you will always be able to buy and sell them, with fees relatively low for passive products. You can buy them from almost every broker or on a DIY investing platform and they can often be held in a SIPP or an ISA.
4 gold ETFs and ETCs to consider
1. HANetf Royal Mint Responsibly Sourced Physical Gold ETC – RMAP
One of the biggest issues with gold is its environmental footprint. It requires a lot of energy to dig up, refine and store gold. There are also issues around potential labour abuses in the supply chain.
The HANetf Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAP) tries to deal with these issues for investors. It only owns 100% post-2019 LBMA-approved gold bars. These are bars from refiners that "have been found, when originally tested, to meet the required standard for acceptability in the London bullion market”.
The Mint is also building the world's first plant to recover gold from electronic waste, creating circular economy gold with a low environmental footprint. It is traded on the London Stock Exchange and charges 0.25% per annum.
2. Invesco Physical Gold ETC – SGLD
The Invesco Physical Gold ETC (LON:SGLD) invests in physical gold kept by JP Morgan Chase Bank’s vaults in London. The ongoing charge is 0.12%.
3. WisdomTree Physical Gold – PHGP
Wisdom Tree Physical Gold (LON:PHGP) is a physically-backed gold ETC that comes in two flavours. PHGP is denominated in sterling and is backed by physical gold held by HSBC Bank. WisdomTree Physical Gold Individual Securities ETC (LON:PHAU) is essentially the same fund denominated in US dollars. Both ETCs carry the same ongoing charge of 0.39%.
4. VanEck Gold Miners ETF – GDX
All the products above are physically-backed ETCs. They’ll track changes in the price of gold, but won’t give you any exposure to gold miners.
An ETF holding mining stocks, such as the VanEck Gold Miners ETF (LON:GDX), could offer this exposure. Given the greater volatility of mining stocks compared to gold prices, this could lead to greater gains when gold prices rise – though it can also exacerbate declines when they fall.
Using an ETF to buy gold mining stocks decreases some of the company risk involved in trying to pick individual mining stocks. In other words, you are buying exposure to the gold mining sector, which ought to follow gold price movements broadly, rather than buying one particular gold mining company which could underperform the gold market simply because it is poorly managed.
