What Are Precious Metals Backed ETFs?

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Last Updated on: 16th September 2021, 07:03 pm

There’s been a lot of talk about precious metals exchange-traded funds (ETFs) recently. With gold performing exceptionally well in 2019—rising from US$1,300 per ounce to above US$1,580 within 12 months—many investors are looking to increase their exposure to the yellow metal as a blue-chip hedge against stock market volatility.   

Precious metals ETFs are funds that cover exchange-traded products (ETPs) that hold precious metals. Most precious metals ETFs have majority holdings in gold bullion, and a sizeable minority allocation in silver (usually in the 10-25% range). Buying gold-backed ETFs allows investors to own precious metals without having to physically own and secure bullion or coins.

The Benefits of Precious Metal ETFs

There are plenty of reasons why investors choose to invest in gold. For instance, gold serves as a hedge against risk in financial markets, is a highly liquid commodity, and gold offsets inflation. However, it’s less clear why investors opt for gold-backed ETFs over physical bullion. We’ve put some of those questions to rest by highlighting the main benefits of gold ETFs below.

Diversification At A Low Cost

When investors purchase precious metal ETFs, they own a small share of a basket of ETPs which is composed of precious metals such as gold and silver. This is a beneficial arrangement for most individual investors who want to achieve diversification across multiple metals and commodities without having to secure or vault the physical bullion themselves.

In other words, precious metal ETFs are both safer and more convenient for the average individual investor looking to diversify their portfolio.

Greater Latitude

If you’re an investor who prefers to actively manage your holdings, you can easily do so with precious metal ETFs. Unlike mutual funds, ETFs can be bought or sold freely when the stock market is trading. By contrast, mutual funds can only be purchased or sold once at the end of the trading day. This allows for greater freedom and flexibility for investors who want to manage their portfolio throughout the day according to changing market conditions.

Tax Advantages

Long-term investors are better off with a gold ETF rather than a mutual fund. Gold-backed ETFs are tax-efficient investment funds because they buy and sell infrequently, which triggers fewer capital gains taxes for their shareholders. Mutual funds and gold bullion must be bought or sold for cash, which incurs capital gains and—you guessed it—capital gains taxes.

Personalization

There are many high-performing gold and precious metals ETFs from which investors can pick and choose according to their goals. While some offer higher allocations in gold, others cede more of their portfolio to other metals such as silver and palladium. Investors can select the ETFs that offer an allocation that suits their needs, goals, and risk tolerance.  

Low Barrier to Entry

You cannot buy gold bullion unless you have the cash to purchase the physical item. You would need US$1,582 (as of January 2020) to buy one ounce of the yellow metal. On the other hand, entry-level investors can purchase a single share of a gold-backed ETF often for less than US$100, which makes it possible for cash-strapped investors to get a foothold in the market.

The Top-Performing Precious Metal ETFs

If you’re considering investing in gold-backed ETFs, you may want to consider the top-performing precious metal funds. Below, we’ve listed the current three top-performing ETFs backed by precious metals. 

SPDR Gold Trust (NYSE Arca: GLD)

The SPDR Gold Trust currently trades at $148.92 and boasts total net assets of US$43.72 billion. The Trust tracks the price of gold at one-tenth of an ounce, which keeps the share price in line with fluctuating gold prices. Currently, the Trust has over 24 million ounces of vaulted gold, making it one of the largest global holders of the precious metal.

iShares Gold Trust (NYSE Arca: IAU)

With net assets totaling US$18.5 billion, the iShares Gold Trust (IAU) is one of the largest gold-backed ETFs in the world. IAU is an excellent option for investors looking to expose their portfolio to the day-to-day movement of gold bullion prices and protect against inflation. This ETF has over 11 million ounces in trust and net asset value of 15.13.

Aberdeen Standard Swiss Gold Shares (NYSE Arca: SGOL)

The Aberdeen Standard Swiss Gold Shares fund is a physically-backed gold ETF, meaning every share is backed by one-tenth of a vaulted ounce of gold bullion. The Aberdeen Standard net asset value is 15.06 and boasts a 4.24% YTD return, making it one of the safest and most affordable golf ETFs on the market.

Ready To Protect Your Wealth?

Gold is poised for another strong rally in 2020. Amid geopolitical tension and international trade uncertainty, financial markets present a high degree of risk to investors. That’s why an increasing share of investors are turning to the yellow metal for a safe hedge against systemic risk, inflation, and stock market downturn.

Today, investing only in stocks, bonds, and cash isn’t enough to achieve portfolio diversification and protect your wealth. Physical commodities such as precious metals and digital commodities such as cryptocurrencies are relatively safe investment vehicles that can supplement a portfolio invested in traditional equities, securities, and currencies. 

The top gold IRA companies offer an excellent long-term store of value that can protect your savings from market volatility. Self-directed Roth IRAs allow investors to purchase alternative investments such as gold in a tax-advantaged retirement account at a low, flat annual fee—making them a worthy addition to any savvy investor’s portfolio.