Are gold ETFs as safe as gold coins and bars?
Gold has long been considered a safe haven commodity, which means that investors can use the precious metal to protect their portfolios from inflation and market volatility. So, if you want to use gold to reduce the overall risk in your investment portfolio, you might be on the right track.
However, physical coins and bars aren't the only way to invest in this precious metal. Another common way to invest in gold is by purchasing shares of gold exchange-traded funds (ETFs). But are gold ETFs as safe as gold coins and bars? Here's what you need to know.
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Are gold ETFs as safe as gold coins and bars?
Gold ETFs may be as safe as gold coins or bars, but that's not always the case. There are two common types of gold ETFs, and whether or not they're as safe as investments in physical gold depends on the type of fund you purchase shares from.
Physical gold ETFs
"In gold ETFs, the issuing company purchases and stores the gold bullion itself, therefore providing investors exposure without the hassle of owning physical coins and bars," says Peter J. Klein, founder and CIO at ALINE Wealth.
As such, each ETF share's worth is proportional to a share of the gold the ETF owns. For example, let's say a gold ETF owns 1 million ounces of gold and has issued 25,000 shares. Each share of this ETF would be worth about 0.025 ounces of gold.
Since these ETFs are backed by physical gold, investing in them is generally just as safe as investing in gold coins and bars — at least in terms of protecting yourself from market volatility and inflation. In fact, depending on your definition of safe, physical gold ETFs may be safer than gold coins and bars.
"Gold ETFs (the commodity, not the miners) are liquid and can be sold quickly and in an orderly fashion on an exchange," says Klein. "Coins and bars are not so liquid, making them a bit more time-intensive to sell."
However, there are some instances in which physical gold may be safer than investments in physical gold ETFs.
"If you are wanting to invest in gold for the purpose of owning a usable form of tender other than the dollar, then no, ETFs will not offer the same safety of actual gold," says Kris Whipple, partner and financial advisor at Kristopher Curtis Financial. He says that's "due to the gold ETF offering no promise that you will gain actual bullion, bars or coins, in return for your investment."
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Golding mining ETFs
Gold mining ETFs typically invest in a highly diversified list of gold mining companies. These companies are often a mix of domestic and international miners of various sizes. Since these companies deal in gold, the price of the commodity has an impact on their profitability and share prices — but these investments may not be as safe as physical gold.
Publicly traded companies, miners or otherwise, have the potential to grow and produce gains for investors. However, these companies can also shrink or fail, resulting in losses. That said, gold mining ETFs are typically well-diversified, but there's still risk involved if companies in the ETF fail to meet their objectives.
How gold ETFs differ from gold coins and bars
The safety of the investment isn't the only way gold ETFs differ from gold coins and bars. Here are two other important factors to consider as you compare the difference between these investment options:
Diversification
Physical gold ETFs and gold coins and bars are essentially the same in terms of diversification. However, gold mining ETFs are far more diversified than investments in physical gold. These funds typically invest in a wide range of mining companies, meaning you may gain exposure to small and large companies locally and around the world when you invest in a mining ETF.
Cost of entry
When you purchase physical gold coins and bars, you'll typically need to pay the gold spot price — or the current market price of gold — plus a dealer fee. The smaller the gold volume you purchase, the larger your per-ounce dealer fee will be. So, it can be important to purchase a meaningful amount of gold when you buy coins and bars to keep your per-ounce costs low. That means you may need to invest thousands of dollars to get a reasonable deal.
On the other hand, you can invest in a gold ETF for the cost of a single share, which generally ranges between $25 and $100. So, gold ETFs may be more financially accessible than physical gold.
The bottom line
No matter if you buy gold coins, bars or ETFs, "gold is a great way to diversify your portfolio in the market," says Whipple. So, if you're looking for a way to add safety and inflation protection to your portfolio, it may be a wise idea to invest in gold.
