Gold-Backed Exchange-Traded Funds (ETFs): Top 4 for 2024

Last Updated on December 23, 2023

Gold-backed exchange-traded funds (ETFs) are investment vehicles that offer exposure to the price of gold. These funds are designed to track the performance of gold as an asset class and provide investors with a convenient and cost-effective way to invest in the precious metal.

In this article, we will explore the best-performing gold ETFs, understand what a gold ETF is, discuss a 3-step process for investing in a gold ETF, and highlight other important factors to consider before making an investment.

Best Performing Gold ETFs

The following list features four of the best-performing gold-backed ETFs, based on their 5-year return average. We will provide an overview of each fund, including their ticker symbol and other relevant information.

Goldman Sachs Physical Gold ETF

• Ticker Symbol: AAAU 5-Year Average Return: 6.2%

The Goldman Sachs Physical Gold ETF (AAAU) is designed to track the performance of gold by investing in physical gold bars. The fund is backed by physical gold stored in secure vaults in London, and the gold bars are subject to regular inspections and audits. AAAU offers investors a cost-efficient and secure way to gain exposure to gold, with a low expense ratio of 0.17%.

VanEck Merk Gold Trust

• Ticker Symbol: OUNZ 5-Year Average Return: 5.9%

The VanEck Merk Gold Trust (OUNZ) is an ETF that seeks to replicate the price performance of gold, by investing in physical gold bullion. One of the unique features of OUNZ is its “redeemable for gold” feature, which allows investors to exchange their shares for physical gold if they meet certain conditions. This ETF has an expense ratio of 0.40%.

iShares Gold Strategy ETF

• Ticker Symbol: IAU 5-Year Average Return: 5.7%

The iShares Gold Strategy ETF (IAU) is designed to provide investors with exposure to the price of gold by investing in physical gold bars.

The fund is backed by physical gold stored in secure vaults in London, New York, and Toronto. With an expense ratio of 0.25%, IAU offers a cost-effective option for investors seeking exposure to gold.

iShares Gold Trust Micro

• Ticker Symbol: MICRO 5-Year Average Return: 5.6%

The iShares Gold Trust Micro (MICRO) is a smaller version of the iShares Gold Trust, offering the same exposure to gold with a lower share price, making it more accessible for individual investors.

This ETF is backed by physical gold stored in secure vaults and has an expense ratio of 0.25%.

What is a Gold ETF?

A gold ETF is an investment vehicle that provides exposure to the price of gold by holding either physical gold or financial instruments that are linked to the price of gold.

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These funds are designed to track the performance of gold as an asset class, allowing investors to gain exposure to the precious metal without the need to buy, store, and insure physical gold.

Gold ETFs are traded on major stock exchanges, offering liquidity and ease of trading similar to stocks.

3-Step Process for Investing in a Gold ETF

1. Research and choose a gold ETF: Start by researching various gold ETFs, paying attention to their historical performance, expense ratio, and the method they use to track the price of gold. Choose the gold ETF that best aligns with your investment goals and risk tolerance.
2. Open a brokerage account: In order to trade ETFs, you will need to open a brokerage account with a firm that offers access to the stock exchange where the chosen gold ETF is listed. Many online brokersoffer commission-free trading and user-friendly platforms, making it easy for individual investors to get started.
3. Place your trade: Once your brokerage account is set up and funded, you can place a trade to buy shares of the gold ETF you have selected. There are two primary types of orders you can use when purchasing ETF shares: market orders and limit orders. Market orders are executed at the best available price when placed, while limit orders allow you to specify a maximum price at which you are willing to buy the shares.

Gold ETFs Pros and Cons

Before investing in gold ETFs, it’s essential to weigh the pros and cons to determine if this type of investment aligns with your financial goals and risk tolerance. Below are the advantages and disadvantages of gold ETFs:

Pros:

1. Diversification: Gold ETFs can provide portfolio diversification by offering exposure to a different asset class than stocks and bonds. Gold often exhibits a low correlation with other financial assets, making it a valuable addition to a diversified portfolio.
2. Liquidity: Gold ETFs are traded on major stock exchanges, offering liquidity and ease of trading similar to stocks. This allows investors to buy and sell shares throughout the trading day, enabling quick entry and exit.
3. Lower Costs: Investing in gold ETFs typically involves lower costs compared to investing in physical gold. There is no need to pay for storage, insurance, or transportation fees, as the gold is stored and insured by the ETF provider. Additionally, gold ETFs often have lower expense ratios than other gold investment options, such as mutual funds.
4. Tax Efficiency: Gold ETFs can be more tax-efficient than owning physical gold, as they are often structured as grantor trusts or open-end investment companies. This structure allows investors to defer taxes on gains until they sell their shares, rather than paying taxes on annual distributions.

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Cons:

1. Indirect Ownership: Investing in a gold ETF means that you do not directly own physical gold. This can be a disadvantage for investors who want to take physical possession of their gold investments in case of a financial crisis or other emergencies.
2. Counterparty Risk: Gold ETFs that use financial instruments, such as futures contracts or swaps, to track the price of gold are subject to counterparty risk. If a counterparty fails to fulfill their obligations, it can negatively impact the ETF’s performance.
3. Tracking Error: Gold ETFs aim to track the performance of gold, but there may be discrepancies between the ETF’s returns and the underlying asset’s returns due to fees, expenses, and other factors. This tracking error can result in the ETF not accurately reflecting the performance of gold.
4. Limited Exposure: Gold ETFs provide exposure to the price of gold, but they do not offer exposure to other precious metals, such as silver or platinum. Investors looking for a more diversified precious metals exposure may need to consider other investment options.

By carefully considering the pros and cons of gold ETFs, investors can make informed decisions about whether this type of investment is suitable for their portfolio and investment objectives.

Other Important Factors to Consider Before Investing in a Gold ETF

When evaluating gold ETFs as a potential investment, it is essential to consider several factors beyond performance, fees, and the investment process. The following are additional aspects to take into account before investing in a gold ETF:

1. Inflation and Currency Risks: Gold is often considered a hedge against inflation and currency devaluation. However, it is essential to recognize that gold’s performance can be influenced by fluctuations in inflation rates and currency values. As a result, investors should assess the impact of these factors on their overall investment strategy and consider whether a gold ETF aligns with their risk tolerance and financial objectives.
2. Regulatory Environment: Gold ETFs are subject to regulations in the countries where they are traded and operate. Changes in these regulations can impact the performance and operation of gold ETFs. Investors should stay informed about the regulatory environment in their jurisdiction and consider potential changes when evaluating gold ETF investments.
3. Management Team and Sponsor: The management team and sponsor behind a gold ETF play a crucial role in the fund’s success. Investors should research the experience, expertise, and track record of the management team and sponsor to ensure that they have a proven history of managing gold investments and maintaining the integrity of the fund.
4. Gold Market Volatility: The price of gold can be volatile and influenced by various factors, including geopolitical events, economic data, and investor sentiment. Investors should be prepared for fluctuations in the price of gold and understand that gold ETFs may experience periods of increased volatility.
5. Liquidity: While gold ETFs are generally considered liquid investments, it is essential to assess the trading volume and liquidity of the specific ETF you are considering. Lower liquidity may result in wider bid-ask spreads and make it more challenging to buy or sell shares at the desired price.
6. Tracking Error: Gold ETFs aim to track the performance of gold, but they may not always perfectly replicate the price movements of the underlying asset. Tracking error refers to the difference between the ETF’s performance and the performance of its benchmark. Investors should be aware of the potential for tracking error and consider the historical tracking error when evaluating gold ETFs.
7. Leverage and Inverse ETFs: Some gold ETFs employ leverage or inverse strategies, which can magnify gains and losses. While these ETFs can provide significant returns in favorable market conditions, they can also result in substantial losses in unfavorable conditions. Investors should carefully consider their risk tolerance and investment objectives before investing in leveraged or inverse gold ETFs.

By taking into account these additional factors when evaluating gold ETFs, investors can make more informed decisions and better align their investments with their financial goals and risk tolerance.

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Summary

Gold-backed ETFs offer investors a convenient and cost-effective way to gain exposure to the price of gold.

By understanding the best-performing gold ETFs, the nature of gold ETFs, and the process of investing in them, you can make informed decisions about whether and how to incorporate gold ETFs into your investment portfolio.

Keep in mind the importance of diversification, tax implications, storage and insurance costs, and counterparty risk when considering gold ETFs as part of your overall investment strategy.

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