5 of the best gold ETFs
Some investors like to hold gold as an insurance policy against uncertainty, but buying the physical metal can be tricky. Here are the best gold ETFs to buy instead.
Owning one or two of the best gold ETFs could help your portfolio returns in 2023.
Indeed, gold is something we always recommend you hold. Not a huge amount – just 5%-10% as “insurance” for your portfolio. Because the gold price is not correlated to many other assets such as equities, many investors see gold as a “safe haven” investment.
Investing in gold has also traditionally been seen as a hedge against inflation – that’s not been so true recently with the strength of the US dollar (though, as Dominic explained a little while ago, it’s a different story when looking at gold in sterling terms).
Dzmitry Lipski, Head of Funds Research, interactive investor says, "The historic role of gold has been as a store of value during economic crisis. It is generally accepted that gold could also be used as an inflation hedge and, therefore, rising inflation is necessary for the cost of gold to increase, That's because gold is priced in US dollars, so when each dollar becomes less valuable it takes more of them to buy the same amount of gold.
"Conversely, low inflation and a strengthening US dollar should be seen as negative for gold prices," he adds.
So what’s the best way to invest in gold?
You could stock up on jewellery or buy gold bullion in the form of physical coins or bars. That will give you some nice shiny trinkets to hold and admire, but it comes with the expense and worry of storing them safely.
If you’re feeling adventurous, you could buy shares in gold miners. But these often don’t track the price of gold very closely. Mining is a very cyclical business that regularly goes from boom to bust.
Josh Saul, CEO at The Pure Gold Company says, "ETFs are easy to invest in and very liquid but they are one half of a transaction with a bank or investment vehicle, so they come with counterparty risk. Meanwhile, mining stocks are intrinsically linked to the operations and profitability of the company rather just than the gold price."
"At a time when people are worried about the strength or integrity of counterparties, physical gold bullion reduces that risk because it sits outside the banking system. It can also have tax benefits (VAT and CGT free depending on individual circumstances) which add to its value as an investment," Saul adds.
The best gold ETFs: the simple way to invest in gold
An alternative is to invest in a gold exchange-traded fund (ETF). This is a fund that aims to track the price of gold.
The most straightforward gold ETFs are backed by physical gold – they buy gold bullion and store it in secure vaults. The most complicated use derivatives or options to “leverage” your investment and magnify gains. But they will also magnify losses, so be careful.
Leveraged ETFs also tend to have higher fees than those that are backed by physical gold. So, if you’re buying gold to provide security, you should stay away from leveraged funds. When investing in ETFs, simplicity is the key.
A word on European gold ETFs. The EU does not allow ETFs that track a single commodity. Instead, the funds that do this are called “exchange-traded commodities”. The difference between an ETF and an ETC is negligible, but ETFs backed by physical gold are ETCs, not ETFs.
As well as funds that track the price of gold, there are also funds that invest in gold mining stocks. But, as mentioned above, they do not track the price of gold very closely.
What are some of the best gold ETFs and ETCs?
Wisdom Tree Physical Gold is a physically backed gold ETC that comes in two flavours. LSE:PHGP is denominated in sterling and is backed by physical allocated gold held by HSBC Bank. It has an ongoing charge of 0.39%. LSE:PHAU is essentially the same fund denominated in US dollars and carries the same ongoing charge of 0.39%.
If you’d rather have your gold stored in Switzerland, the WisdomTree Physical Swiss Gold ETC (LSE: SGBS) stores its gold in secure vaults in Zurich on behalf of JPMorgan Chase Bank. The ongoing charge is 0.15%.
The iShares Physical Gold ETC (LSE: SGLN) invests in physical gold kept by JPMorgan Chase Bank in London. The ongoing charge is 0.12%
A more recent fund is HANetf Royal Mint Responsibly Sourced Physical Gold (LSE: RMAP) which holds allocated gold held by the Royal Mint in Wales.
The fund aims to hold gold sourced on a “best endeavour” basis that ensures the metal does not come from conflict zones. Investors can redeem their gold in the form of bars or bullion coins. The ongoing charge is 0.22%.
"Alternatively, investors may also want to consider investing in gold mining stocks via passive ETF such as VanEck Gold Miners ETF (GDX)," says Dzmitry Lipski.
"However, investors should be aware that physical gold and gold mining stocks are quite different asset classes. While physical gold is better for inflation hedging and diversification, gold mining stocks provide an operating leverage for investors comfortable with greater risk. As the gold price appreciates, the mining company's margins improve, so the potential return to investors likely goes up at a faster rate than the rise in gold. In this case, mining stocks become a better option than holding physical gold," Lipski adds.
All of the above funds can be held in an Isa and a Sipp.