Investors seeking a non-correlated asset relative to stocks and bonds should consider allocating a small portion of their portfolio to gold. When there is talk of inflation and negative sentiment around the U.S. dollar, gold is seen as a safe haven.

There are two easy options for gold investors: individual companies that benefit from this flight to quality, or gold-focused exchange-traded funds (ETFs). In this article we'll have a look at some of the top ETFs, examining their holdings are, and what they can do for your portfolio. (To begin with the basics, read Commodities: The Portfolio Hedge and How To Use ETFs In Your Portfolio.)

Physical Gold ETFs
The iShares Comex Gold Trust (AMEX:IAU) and streetTRACKS Gold Shares (AMEX:GLD) currently hold 100% physical gold bullion. GLD is one of the largest and most popular pure-play gold ETFs with $17 billion in assets under management. Over the past five years, IAU and GLD have been the best performers among the gold ETFs discussed in this article.

It's important to remember that individual investors should consult a tax advisor when investing in commodity-based ETFs that hold the physical item, as the tax treatment for long- and short-term gains could be different than holding other traditional ETFs.

Gold Mining ETFs
Market Vectors Gold Miners ETF
(AMEX:GDX) holds a globally diverse mixture of Gold mining companies including:

  • Canada's Barrick Gold Corporation (NYSE:ABX),
  • South Africa's Anglogold Ashanti, Ltd (NYSE:AU), and
  • Peru's Buenaventura Mining Company (NYSE:BVN).

The SPDR S&P Metals & Mining ETF (AMEX:XME) tracks the S&P Metals and Mining Select Industry index making it less of a pure gold play since steel and coal mining companies are also present on the index. XME has been the best performer year-to-date among all of the ETFs mentioned.

Futures Contract ETFs
The PowerShares DB Gold (AMEX:DGL) uses futures contracts to track the performance of a Deutsche Bank Gold Index. PowerShares DB Precious Metals (AMEX:DBP) also uses futures contracts with a heavy focus on gold futures and a small exposure to silver futures. DGL and DBP are the smallest amongst these funds, each has less than $100 million in assets under management.

Dollar Won't Stay Down Forever
The U.S. Dollar, while still down since the beginning of 2008, has made a small move upward since the end of May. It's worth mentioning that gold traded at an all-time high of $1,000 an ounce on March 12 of this year. The explosion in the price of gold should be tempered with its inflation adjusted performance.

According to New Frontier Advisors, a research and investment advisory firm, gold has an annualized inflation-adjusted return of just over 2% for the past 32 years. Pension funds and endowments have begun to make investments in gold, so investors should also keep an eye out for a change in sentiment of these large money managers whose buying and selling decision could move the ETFs against individual investors.

Gold is meant to take the sting out of a portfolio that is full of stock-only positions. While its long term returns are not stellar, it does offer a measure of diversification that is not subject to earnings forecasts or complex accounting rules, but rather by the simple laws of supply and demand.

For further reading, be sure to check out our related articles Getting Into The Gold Market and A Holistic Approach To Trading Gold.

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