Gold ETF vs. gold mutual fund: Which is right for you?

For centuries, investors have considered gold to be among the most reliable and profitable investment opportunities. Gold offers a safe haven from economic turbulence like inflation and recessions, and it can help diversify your portfolio to minimize risk and maximize returns.

There are many ways to invest in gold, including gold exchange-traded funds (ETFs) and gold mutual funds. Both are pooled investment funds that give you exposure to gold through a mix of assets.

If you're considering investing in gold, it's important to understand the difference between these two investment options.

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What is a gold ETF?

A gold ETF is a pooled investment fund that tracks the performance of gold prices. Gold ETFs are traded on stock exchanges, with each share in the fund representing a fixed amount of gold. Gold ETFs offer investors numerous advantages over buying physical gold, such as low investment minimums, low annual expenses and minimal paperwork.

You can trade gold ETFs on a stock exchange the same as you would stocks. Prices rise and fall throughout the day as the ETF is bought and sold, and you can trade throughout that time to capitalize on these changes. Gold ETF prices are based on the price of gold and are typically passively managed.

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What is a gold mutual fund?

A gold mutual fund is a pooled investment fund that invests in shares of companies in the gold mining industry. Mutual funds pool money from many investors to construct a portfolio of securities with a shared investment goal. Gold mutual funds offer investors benefits such as the potential for higher returns than gold ETFs when the price of gold rises.

Gold mutual funds prices come out at the end of the trading day and can only be traded at that time. Their price is based on the total value of the assets in the fund. 

How to choose the right type of gold investment for you

While gold ETFs and mutual funds are similar, there are some key differences to consider. 

When a gold ETF is better

Here's when a gold ETF might be better for you:

• When you want a lower investment minimum: You can purchase gold ETFs by the share, which allows you to invest in them even if you have a small amount of money. Gold mutual funds, on the other hand, often have investment minimums of $1,000 to $3,000.
• When you want more hands-on control: If you want the ability to trade throughout the day to take advantage of price fluctuations, an ETF is best for you. Gold mutual funds can only be traded at the end of the day when the market closes.
• When you want lower costs: Because they're usually passively managed, ETFs tend to have lower costs than mutual funds.
• When you want optimum tax efficiency: ETFs engage in less internal trading, creating fewer taxable events and fewer capital gains. Since mutual funds are actively managed, assets are traded more often, resulting in more capital gains taxes.

When a gold mutual fund is better

A gold mutual fund might be better for you in the following instances:

• When you want the potential for higher returns: Mutual funds are actively managed by professional portfolio managers who attempt to beat the market by monitoring the fund's performance and trading assets as they see fit. This means they may be riskier, but if you're willing to accept that risk, your investment could potentially outperform the market.
• When you want more professional support: ETFs are passively managed, leaving the trading decisions up to you. Some investors prefer having more control over their investments, but if you prefer leaving the decisions in the hands of a professional, a mutual fund may be better for you.
• When you want to make automatic investments and withdrawals: Mutual funds allow you to set up automatic investments and withdrawals. ETFs do not.

The bottom line

Both gold ETFs and gold mutual funds can be valuable additions to your portfolio. Which investment vehicle you choose depends on your personal investment goals, preferences and risk tolerance. Whatever one you choose, it's essential to conduct thorough research before investing, understand the pros and cons of each and compare funds to find the best one for you.