Why Choose Gold ETFs for Your Portfolio?
Gold has fascinated investors for centuries. Whether as a safe-haven asset during times of economic uncertainty, a tangible asset, or a tool for diversification, this precious metal continues to hold a special place in wealth management strategies.
Today, it is no longer necessary to buy physical gold bars or coins to invest in gold. Thanks to gold ETFs, investors can gain exposure to the price of gold directly through the financial markets, via a securities account, or even a life insurance policy, depending on the investment vehicles available.
But how do gold ETFs actually work? What are their advantages, risks, and the various products available on the market? Here’s what you need to know before investing.
What is a gold ETF?
An ETF (Exchange-Traded Fund) is a fund listed on a stock exchange whose objective is to track the performance of an index, a sector, or a financial asset. Most often, these are referred to as gold ETFs, although some products available on the European market are legally classified as ETCs (Exchange-Traded Commodities).
In the case of gold ETFs, the fund seeks to track the price of gold as closely as possible.
In practical terms, an investor can buy shares of a gold ETF just as they would buy stocks on the stock market, without having to store physical metal themselves.
Gold ETFs therefore offer a simple and accessible way to invest in the gold market.
How Does a Gold ETF Work?
There are several types of gold ETFs, depending on their tracking method and structure.
Physical Gold ETFs (Physical Gold ETFs)
So-called “physical” gold ETFs are backed by actual gold reserves held in the form of bars in secure vaults.
Each share of the fund represents a fraction of this physical gold.
This is particularly true of certain products offered by recognized investment management firms, such as:
- iShares;
- Amundi;
- WisdomTree;
- Invesco;
- Xtrackers.
Synthetic ETFs
Synthetic ETFs do not directly hold physical gold. They use financial derivatives to track the performance of the gold price.
This replication method can sometimes allow for more accurate tracking of the index, but it also involves additional counterparty risk.
Why Invest in Gold?
Gold is often considered a safe-haven asset. Historically, its price has tended to attract investors during periods when:
- high inflation;
- geopolitical tensions;
- economic slowdown;
- or high volatility in the financial markets.
Unlike a stock or a bond, gold does not generate income. Its appeal lies primarily in:
- its potential for diversification;
- its partial decorrelation with certain financial markets;
- and its potential role in asset protection.
Nevertheless, the gold market continues to be influenced by numerous factors:
- interest rates;
- the value of the U.S. dollar (USD);
- central banks' monetary policy;
- global supply and demand;
- or the geopolitical context.
Gold's performance can therefore vary significantly depending on the time period.
What are the advantages of gold ETFs?
A Simple Way to Gain Exposure to the Gold Market
ETFs allow you to invest in gold directly through a traditional stock trading platform, without having to manage:
- the purchase of bullion;
- transportation;
- insurance;
- or the storage of physical metal.
High liquidity
Gold ETFs are continuously traded on financial markets. Investors can therefore buy or sell their shares relatively easily during market hours.
Fees that are often lower than those for physical gold
Buying physical gold generally involves:
- storage fees;
- purchase incentives;
- security costs;
- or differences between purchase and resale prices.
Gold ETFs often have lower management fees by comparison.
A tool for diversification
Gold can help diversify a portfolio consisting mainly of:
- shares;
- bonds;
- index ETFs;
- SCPI;
- or other financial assets.
In certain market conditions, this diversification can help reduce the portfolio's overall volatility.
What are the risks associated with gold ETFs?
Despite their advantages, gold ETFs also carry risks that it is essential to understand before investing.
Market Risk
The price of gold can fluctuate significantly, both up and down.
Unlike some guaranteed investments, a gold ETF therefore carries a risk of capital loss.
The Lack of Returns
Gold pays neither dividends nor interest.
Performance depends solely on changes in the price of the precious metal.
Currency Risk
Most gold ETFs are indexed to a price denominated in U.S. dollars (USD).
A European investor may therefore be exposed to fluctuations in the EUR/USD exchange rate, even though some products offer protection against currency risk.
The Risk Associated with Replication
In the case of synthetic ETFs, investors also face counterparty risk associated with the derivatives used.
What gold ETFs are available on the market?
The gold ETF market has grown significantly in recent years. Several major asset management firms now offer products that provide exposure to the precious metal.
Some examples of recognized issuers
Investors can compare several factors before choosing a gold ETF:
- management fees;
- the volume of outstanding balances;
- liquidity;
- the replication method;
- the quote currency (EUR, USD, or GBP);
- or the quality of performance monitoring.
Gold ETFs vs. Gold ETCs: What's the Difference?
In Europe, many gold-related products are technically ETCs (Exchange-Traded Commodities) rather than ETFs in the regulatory sense.
The main difference, then, lies in their legal structure.
ETCs are commodity-backed debt securities, while ETFs are diversified investment funds.
In everyday language, however, investors often use the term “gold ETF” to refer to all of these listed products related to the precious metal.
Can you invest in gold through a life insurance policy?
Yes, some life insurance policies provide access to gold-linked investment vehicles through unit-linked plans.
Investors can thus incorporate exposure to precious metals into a broader wealth management strategy, alongside:
- equity ETFs;
- bond funds;
- SCPI;
- or other financial instruments.
At Raizers, investment opportunities are presented in an educational manner within the life insurance policy to help individual investors better understand the investment vehicles offered and their features.
It should be noted, however, that unit-linked products carry a risk of capital loss.
How Can You Effectively Incorporate Gold ETFs Into Your Portfolio?
Gold is generally considered a diversification asset rather than a core investment.
Many investors therefore choose to allocate a limited portion of their portfolio to these assets in order to balance their exposure to traditional financial markets.
Before investing, it may be helpful to define:
- his investment horizon;
- their risk tolerance;
- his or her financial goals;
- and the role that gold should play in its overall strategy.
The choice between physical gold ETFs, synthetic gold ETFs, or products hedged against currency risk will also depend on the investor’s profile.
Key Takeaways on Gold ETFs
Gold ETFs offer an accessible way to invest in the gold market without buying physical gold directly.
In particular, they allow for:
- to diversify a portfolio;
- to gain exposure to the price of gold;
- and to invest easily through the financial markets.
Like any investment, however, they do involve risks:
- volatility;
- foreign exchange risk;
- lack of performance;
- or risk of capital loss.
Before investing, it is essential to compare the various products available, their fees, their tracking methods, and how well they align with your financial goals.