The ins and outs of gold-backed ETFs

by , 26 November 2015

If you want exposure to gold in your portfolio, one option you have is to invest in gold-backed exchange traded funds (ETFs).

So how do these ETFs work? And what should you look at if you want to invest in such an ETF?

Let's take a closer look…
 

How a gold-backed ETF works

 
Gold-backed ETFs are ETFs you can buy that give you exposure to physical gold.
 
The provider of a gold-backed ETFs buys bullion and stores it with a custodian. The ETF provider then issues shares for the fund that trade on a stock exchange.
 
The price of the ETF then tracks the price of gold minus costs for storage and administration.
 
One of the main benefits of gold-backed ETFs is that you can own gold without having to worry about storing it or insuring it yourself. 
 

Investing in gold-backed ETFs

 
One thing you should pay attention to when looking for a gold-backed ETF to invest in is the fees. The easiest way to do this is to check the total expense ratio (TER) of the fund. This gives you the total fees as a percentage of the fund’s total assets.
 
Also, not all gold-backed ETFs are created equally. Not all of them are physically backed by gold. For example, some use derivatives products to track the gold price.
 
If you want to exposure to pure gold, ensure you invest in an ETF that holds gold in its physical form.
 
In South Africa, NewGold ETF is an example of a physically gold-backed ETF. The ETF holds its gold in a vault in the UK.
 
So there you have it. The ins and outs of gold-backed ETFs.
 
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