You must’ve come across a term called ETF in the stock market. It is also possible that you have heard a great deal about them.
However, do you know how they can add value to your portfolio?
In this article
- What Is an Exchange Traded Fund?
- How to Invest in Gold ETF?
- How Do ETFs Work?
- Why Should You Invest in Gold ETFs?
- Disadvantages of Gold ETF?
What Is an Exchange Traded Fund?
An exchange-traded fund is generally an investment fund, with the convenience of investing money in a pool. They are traded via stock markets, using assets like stocks, bonds or commodities. ETFs are predominantly traded at values close to their net asset value.
Commodity ETFs are an incredible mode of investments for investors who are looking to diversify their value by investing in stocks with moderate risk.
In the case of gold ETFs, the primary asset in trade is gold.
How to Invest in Gold ETF?
Indians are obsessed with gold. If you think, you can own gold using gold ETFs and trade in gold, let us clear it out for you.
In case you invest in Gold ETFs, you are necessarily a party to a contract which is measured with the fluctuations in the price of gold. The derivatives can only be used as a claim against another party, for instance, a broker.
Even if you redeem your pooled money, you still won’t be able to receive gold, but a monetary value equivalent to it. That’s exactly why millennials today prefer investing in paper gold, rather than physical gold.
Financial specialists utilize gold ETFs to follow and mirror the cost of gold. While the advantages include that the assets are backed up by the gold, it is merely used to provide investors with an idea about how the prices work. It is not intended for owning or possessing the actual metal.
How Do ETFs Work?
ETF traders purchase or offer ETFs directly from or to approved members, which are substantial agent sellers with whom they have entered into agreements with.
These approved members may wish to put their investments into the ETF shares as long as possible, yet, they generally go about as market producers on the open market, utilizing their capacity to trade creation units with their underlying securities to give liquidity of the ETF offers.
In addition to that, they help to guarantee that the market value of the assets approximate to the net asset value on the daily.
Other financial specialists, for example, people utilizing a retail agent, trade ETF shares in this other market. Apart from that, the ETFs may be exchanged on any of the trading days in the market.
Why Should You Invest in Gold ETFs?
The risk of investing in Gold ETFs is similar to the risk of investing in bonds which a defensive asset way. Numerous investors use them to support themselves against monetary and political disturbances, just as money corruption.
1.Gaining Exposure of How Gold Prices Move
One may invest in ETFs to understand how the fluctuations of gold prices happen. It may also help in apprehending how the variations in other currencies affect this shift in the prices of gold.
2. It Has Characteristics of a Mutual Fund
An ETF has the feature of a mutual fund, since ETFs invest in pooled money from several investors. Therefore, it immediately lowers the risk involved, by a bit at least.
3. Lower Transaction & Management Costs
Investing in ETFs is not that big of a deal. There is no minimum investment value in a few cases. Even if you’re spending the rest of the times, the minimum amount would be low.
Moreover, mutual fund distribution platforms offer low to no managerial cost or commission, which is appealing to a first-time investor.
The best thing about investing in ETFs would be that you can save your income from taxation. But only if you invest in them. The taxes are only levied when you sell the entire investment not while you’re holding it!
You May Trade in Another Country
In case there is a loss because of the drop in your home currency; you always have the option to trade with countries whose income depends primarily on gold.
TIP: The prices of gold and the US Dollar are negatively related. So, look out!
If you’re just looking around in the market or you want to try something new, you should invest in ETFs for high returns in a shorter time.
Disadvantages of Gold ETF?
If you do not have an appetite for risks, it is not recommended to invest in the Gold ETFs. Due to the high risks related to gold prices and high chances of normal fluctuations, it might not be feasible for some.
2. No Long Term Investment
While intra-day exchanging openings made by ETFs may profit momentary ETF merchants, they might not serve a long haul financial specialist’s fundamental standpoint.
3. You Can’t Own Gold
An exchange-traded fund only functions as a derivative against any claims. You might never be able to make and earn gold even after trading with it.
Similarly, as with any venture—an organization stock, a list, or different alternatives—you should ensure that you examine any stock exchange before indulging in trade, either long or short.
Observe how an ETF or ETN responds to various economic situations, investigate as to why it is occurring, and see what’s in the store. Make a point to seek an expert’s advice, or another budgetary industry proficient, if you feel the need to do so.
Disclaimer: The views expressed in this post are that of the author and not those of Groww