Gold has been one of the major and most popular forms of investment for people around the world. The yellow metal is precious and is closely associated with holding a form of wealth. Investment in gold can be undertaken in two ways, i.e, through the purchase of physical gold and investment in gold ETFs or exchange-traded fund. Traditionally, the purchase of gold is made in the form of gold bullion, jewelry, and coins; however, there are several downsides that are attached to buying gold in this format.

An ETF or exchange-traded fund is a type of investment vehicle that works through the collective pooling of money from varied investors. The pool is used to acquire assets or a group of assets. ETFs work in a fashion that is very similar to that of mutual funds, baring a few points of distinction. Investing in gold ETFs does not mean owning gold. One does not receive gold upon redeeming a gold ETF, but it generates cash of the same value.

Reasons to invest in gold ETFs

• The investors of the day have come to prefer the diversification of their investments into different options. Rather than concentrating investments into holding physical gold, gold ETFs enable investors to have a better control and effectively manage the performance of their portfolio. This has led to a growing number of investors turning toward gold ETFs as a great option for indirect investment.
• Unlike with physical gold, investing in gold ETFs is a more secure option. It eliminates the risks that accompany the ownership of physical gold. Physical gold brings with it the need to pay for a secure place for storage and insurance while bearing the loss in case of misplacement.
• Gold ETFs pose to be a great form of exposure to the fluctuation of gold. It may also be used to hedge the risk of a gold commodity. In a certain scenario, if the investor faces an elevated risk at times when the price of gold is high, holding gold ETFs can aid in reducing the percentage of loss in the position.
• Investing in gold ETFs is good for investors who wish to gain exposure to the gold mining industry. Gold is not just a commodity ETF but can also act as an industry ETF. Investors with fold ETFs can use this as a great strategy to fit and build a strong portfolio.
• For investors looking to gain foreign exposure, gold ETFs can be of good use. There are several countries that depend on gold with the metal being the main source of income. In such countries, the investor can use gold ETFs for protection and balance out the grave effect of the portfolio assets that come with risk.

Essentials for buying gold ETFs

One of the first steps involved in the process of investing in gold ETFs is the need for a brokerage account. An investor must have a brokerage account and broker who will charge a commission for undertaking the purchase and sale of the ETFs. Gold ETFs trade intraday and thus make it easier to be sold and bought conveniently. The process can be viewed as one of the easiest ways to undertake gold trade, provided that the requirements of an account are in place.

How much of gold ETFs make for a good investment?

There are several pros and cons that come with the overall investment in gold, irrespective of whether in the physical form or in ETFs. The first thought that may come to mind when trading gold is “how much should one buy?”.  The value invested in gold ETFs must be driven depending on one’s personal situation or capability. As per expert recommendations, investment in metals must not make for a very big portion of the portfolio. A position of about 5% to 15% proves to be a prudent hold for most investors.

Disadvantages of investing in gold ETFs

Like with every kind of investment, investing in gold ETFs too comes with its own set of disadvantages. For an investor looking to own a gold asset, the same cannot be done through gold ETFs. The investment comprises of contracts and derivatives that can only be redeemed in the form of cash.

In certain cases, depending on the location, the investment may not have the same capital gain tax breaks that are accompanied by other exchange-traded funds. Thus, if you are looking to invest in gold ETFs, it is essential to carefully evaluate all the factors or consult an expert.