Gold rallied last week, ending a four-week skid. The rebound suggests a halt to the recent slide and investors who want to get to the gold party late, rather than never, may want to consider doing so now. There are several ways to invest in gold. Exchange-traded funds are one of the better options for retail investors looking to gain gold exposure, yet not all gold ETFs are equal. Which ETF should investors who want to add gold to their portfolio choose?

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Risk Factors and Costs
Before picking a gold ETF, investors who are new to both ETF and commodity investing should understand some basic risk factors. Gold ETFs attempt to track the price of real gold bullion. Investors who buy shares of gold ETFs are not buying actual gold bullion. When an investor purchases a share of a gold ETF, the grantor trust company who runs the fund issues shares out of a pool backed by gold bullion that they own. When new gold ETF shares are created to meet growing demand, the grantor trust buys more gold bullion, which is then deposited into a custodian account.

This process creates some subtle differences and risk factors for gold ETF investors, such as creation and sub-custodian risk. Fortunately, these incremental risks are generally minimal from fund to fund, and normally do not make a material impact. The true differentiators that gold ETF investors must look at are cost structure, measured primarily by the expense ratio, and liquidity.

Which Gold ETF Should Retail Investors Go With?
One of the most popular and liquid gold ETF is the SPDR Gold Trust (NYSE:GLD). The SPDR Gold Trust's advantage over other gold funds is greater liquidity, which tightens bid-ask spreads, making it most likely the best option for investors looking to actively trade the ETF. Part of the reason the SPDR Gold Trust's market cap ($67 billion) is so much bigger than other gold ETFs, is institutional ownership; big investors who are better served by the enhanced liquidity.

For retail investors, the iShares Gold Trust (NYSE:IAU) may be another attractive option, because of the lower expense ratio. The iShares Gold Trust expense ratio of 0.25% is much lower than the 0.40% expense ratio of the SPDR Gold Trust. The lower cost structure and last year's 10-for-1 stock split to make the price point more accessible, demonstrate iShares' focus on retail investors. As a result of the stock split, iShares Gold Trust currently trades near $16, whereas the SPDR Gold Trust and the ETFS Gold Trust (NYSE:SGOL) both trade near $160. Of course, bid-ask spreads and commissions factor into the total cost of a gold ETF purchase. Investors making relatively large dollar value trades, may see little price advantage that would make IAU more competitive than GLD or SGOL. Smaller retail investors, however, would likely benefit from IAU's lower expense ratio.

Mining ETFs are another way to play gold. This can be accomplished through the Market Vectors Gold Miners ETF (NYSE:GDX) which tracks large-cap miners. The Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) tracks small-cap miners, offering a higher risk-return profile, compared with the Market Vectors Gold Miners.

The Bottom Line
Over the past month, stock prices of miners have come down along with gold and gold ETFs. Trading near $1,640 per troy ounce, gold is well off the all-time high set earlier this year. The recent correction is a potential entry point for new and existing gold bugs. In addition to valuation, the fundamentals of the gold trade are still intact. Gold's status as the de facto safe-haven global currency and sustained demand for the precious metal from emerging economic superpowers India and China, are long-term catalysts. Considering these factors, gold is an extremely attractive asset class and diversification tool. Of all the gold ETFs available, the iShares Gold Trust could be the optimal way for retail investors to add some bling to their portfolio. (For additional reading, take a look at Who Holds The Largest Gold Reserves?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: United States Gasoline Fund

    Learn about the United States Gasoline Fund, the characteristics of the exchange-traded fund, and the suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: United States 12 Month Oil

    Find out more information about the United States 12 Month Oil ETF, and explore detailed analysis of the characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Nasdaq Biotechnology

    Find out information about the ProShares Ultra Nasdaq Biotechnology exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  4. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  9. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  10. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
RELATED FAQS
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!