Gold ETFs: Investing in Paper Gold Assets For Diversification

Author: Focus on the User | 5 min read
Gold ETFs as Investment

Gold is a popular choice for investment funds as it aids in portfolio diversification. Gold assets can be invested in several different ways. You can invest in gold jewelry, gold coins, gold bars, ingots, etc.

Moreover, you can invest in gold through non-traditional investments that won't require you to have gold in its physical form. This included investing in a gold mining company's shares or exchange-traded funds.

The commodity is traded on the stock exchange just like mutual funds. This investment provides an excellent opportunity to gain exposure to gold's price and performance.

What Are Gold ETFs?

Gold ETFs are exchange-traded funds, and their trade is similar to stocks. They are a popular form of investment and exchange-traded funds meant to track the price changes of physical gold.You get direct exposure to gold through gold ETFs without purchasing, storing, or reselling it directly. Therefore, investors don't own the gold. Instead, they own quantities of gold assets, which helps diversify the portfolio.

Gold ETF is a commodity ETF, and its main asset is gold. Investing in this commodity does not mean you own any gold in actuality.

How Do Gold ETFs Work?

One unit of a gold ETF is equal to one gram of gold. And this should be of 99.5 percent purity. The physical gold is safely deposited in custodian banks and is the basis for the value derived for the units.Investing in them will act as a hedge against any risk of a gold commodity or stock market fluctuations. You can also get exposure to gold fluctuations in the market, but investing in this yellow metal ETF will help you retain your investment funds. If your portfolio consists mainly of funds, it can be at risk when the market is not doing well. In this case, gold ETFs can balance your portfolio and reduce the risk.

The list items for the gold ETFs are presented in descending order of total market capitalization.

How to Invest in Gold ETF?

There are two main methods of investing in gold ETFs. You can do it either directly or indirectly.

The direct way of investing is through opening a Demat account. This is an account that you can open through a stock broker. It records the change in ownership when you buy and sell ETFs, stocks, mutual funds, etc. Once you have opened the Demat account, you can purchase units of ETFs of gold. You can buy this investment product easily on the stock exchange market. Or you can join the gold mining industry through exchange-traded funds.

The indirect way, also known as the passive way, is to invest in gold funds that further invest in ETFs of gold but in an indirect way. HDFC gold fund is one such type of fund that invests in gold ETFs. Hence, if you invest in this gold fund, you will also invest in gold exchange-traded funds. These commodities are known as funds of funds. Most investors who prefer mutual fund investments online use this approach.

Whenever an individual investor invests in ETF, they should ensure that the assets under management in the ETF are the right amount.

Advantages of Investing in Gold ETFs

No change in price

Gold ETF units are traded at the same rate, so there won't be any separate rates for buying and selling them. However, this is different than material gold. Physical gold is sold and purchased at different prices in different parts of the world. The price of gold is also prone to changes. The physical gold price depends upon the current prices of the gold market.


Gold ETFs have high liquidity to offer. This is because you can easily trade them on the stock exchange. Hence, these assets provide convenience. They are listed on stock exchanges. Hence, they are easy to trade than material gold.

No Additional Indirect Cost for Taxes

Individual investors must also be aware of indirect taxes when investing in physical gold. For example, the general sales tax is 3 percent of the buy and sale value when buying gold.

However, with this yellow metal ETF, no such cost needs to be paid as exchange-traded funds are a type of securities. GST is not supposed to be paid on securities. Hence, you do not have to worry about negatively impacting your returns on investment.

Zero exits and entry load

As the trade of gold ETFs is dealt with over the stock exchange, there are no entry or exit load charges.

Increased Purity

With gold ETFs, the purity is set at 99.5%. Anything below the purity of 99.5% is considered out of standard. Hence, investing in ETFs of gold means that you are investing in pure gold. This cannot be guaranteed with physical gold. The market for actual gold might give you little transparency regarding how pure the gold is.

No Need to Worry About Theft

When you invest in gold ETFs, you are not directly investing in physical gold. Your gold exchange-traded funds will be stored in a Demat account. Hence, you do not have to worry about the storage or security of the physical gold. Moreover, physical gold is kept under the security of some custodians or in a safe deposit box; however, there is no need for either thing for a gold ETF. And there are no extra charges for storing the precious metal either.

Find Out How to Invest Gold in Your IRA

Investment Risk of Gold ETFs

Trading Has Time Restrictions

When you invest in gold ETFs, you can't do so whenever you wish. Rather, the time is restricted to the working days of Monday to Friday between the time of 9:15 am to 3:30 pm. Physical gold does not have such strict time restrictions. Instead, it is available for trade for the entire year, generally between 9 am to 9 pm standard shop times.

Risk of Fluctuation

Gold tends to perform well in value when there is economic instability. And most of the time, you will observe the value of gold increase only when the market is not doing well. Hence, depending on the economic situation, the price of gold fluctuates.

Expense Ratio

An expense ratio is a fee charged by the asset management company added to the purchase cost to manage your funds properly. These fees can include fund management and costs regarding how to run the fund properly. Expense ratio cost is generally not associated with physical gold; however, with gold ETFs, you will have to pay these. Potential investors should consider an expense ratio of at most 1.5%.

Next Steps to Adding Gold ETFs to Your Portfolio

Before making any investment decision, you should know what the asset is and the benefits and risks of investing in that particular asset.

Hence, when you invest in a gold ETF, you should know about its liquidity and risk and assess its advantages and risks. Trading gold ETF is an investment strategy to boost their retirement nest egg and diversify their portfolio.

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Disclaimer: Content on this website is not intended to be used as financial advice. It is not to be used as a recommendation to buy, sell, or trade an asset that requires a licensed broker. Consult a financial advisor.

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