Gold and ETFs can catch an investor’s attention for very different reasons. Both have their appeal. Gold is known for its long history as a store of value, often seen as a safe haven during economic uncertainty. ETFs are favoured for their simplicity, diversification, and accessibility.

But which is right for you? The answer depends on your financial goals and investment strategy. Some investors stick to one, while others use both to build their portfolios. In this article, we’ll compare gold and ETFs to help you decide which approach might suit your investing needs.

What is an ETF, and why invest in it?

An exchange-traded fund (ETF) is an investment fund that trades on a stock exchange (like the Australian Securities Exchange ), like a regular share. ETFs allow investors to access a wide range of assets, such as shares, bonds, or commodities – all in one package. Their ability to provide diversification within a single investment appeals to many.

Investors also appreciate ETFs for their simplicity and affordability. They typically offer lower fees compared to mutual funds , making them cost-effective. ETFs also provide flexibility – you can buy or sell them at any time during market hours.

Some ETFs focus on broad markets, while others target specific sectors or themes. This variety makes them a popular choice for long-term investors.

While ETFs can potentially add value to many portfolios, they may not suit every investing goal.

What is gold as an investment class, and why invest in it?

Gold has been valued for centuries as a symbol of wealth and security. Today, it remains a popular investment choice.

Many see gold as a hedge against inflation or currency fluctuations . Its value often moves differently to shares, making it appealing during uncertain times.

You can invest in physical gold, such as bullion or coins; or through financial products like gold mutual funds or gold ETFs . Each option comes with different costs and levels of convenience.

Unlike shares or ETFs, gold doesn’t produce income, like dividends. Instead, its appeal lies in its potential for price growth. Central banks (like the Reserve Bank of Australia ) also play a role in the gold price, influencing its supply and demand globally.

Whether you’re considering physical gold or alternative options, its value in a portfolio depends on your investment goals and strategy.

How do ETFs and gold differ as investments?

ETFs and gold serve different roles in a portfolio. Understanding their differences can help you decide how each could fit into your strategy. Below is a detailed comparison of key features:

Feature	ETFs	Gold
Purpose	Aims to diversify and grow wealth.	Often used as a potential hedge against inflation or uncertainty.
Types available	Covers shares, bonds, commodities.	Physical gold (bullion, coins), gold ETFs, or gold mutual funds.
Liquidity	Easy to buy or sell during market hours.	Physical gold may require extra effort; gold ETFs are liquid.
Costs	Includes management fees (expense ratio).	Physical gold has storage and insurance costs; ETFs may have lower fees.
Income generation	Some ETFs pay dividends or interest.	Gold does not generate income; returns rely on price growth.
Volatility	Can vary depending on underlying assets.	Gold prices can be volatile, influenced by supply and demand.
Ownership	No direct ownership of assets (for most ETFs).	Physical gold offers tangible ownership; ETFs do not.
Market influences	Performance is tied to the markets or sectors they track.	Influenced by global factors like central banks, inflation, and geopolitics.

Both ETFs and gold offer distinct benefits and risks (more on that soon). As we’ve said, the choice depends on your financial goals and investment approach. For some, combining them may offer a balanced strategy.

What are the pros and cons of investing in ETFs?

ETFs offer a range of benefits, but also come with potential drawbacks. Here’s what to consider:

Potential benefits of ETFs:

• Provide diversification by allowing access to multiple assets in one investment.
• Easy to trade on stock exchanges during market hours.
• Typically have lower expense ratios compared to mutual funds.
• Some ETFs pay dividends or interest, offering income opportunities.
• High liquidity, making it simple to buy or sell as needed.

Potential drawbacks of ETFs:

• Can be affected by market fluctuations, which may impact returns.
• Ongoing fees, like the expense ratio, can reduce net returns over time.
• Not all ETFs pay dividends or generate income.
• Investors don’t directly own the underlying assets.

What are the pros and cons of investing in gold?

Gold is a unique asset with its own set of advantages and limitations. Here’s what to keep in mind:

Potential benefits of gold:

• Offers focused exposure to a single asset class.
• Seen as a potential hedge against inflation or economic uncertainty.
• Physical gold provides tangible ownership.
• Gold ETFs offer easier access and lower costs than physical gold.

Potential drawbacks of gold:

• Gold prices can be volatile, influenced by global supply and demand.
• Physical gold involves storage and insurance costs, which can add up over time.
• Does not generate income; returns rely solely on price growth.
• Physical gold is less liquid than ETFs, though gold ETFs trade easily.

Which is better for different types of investors?

Different types of investors may prefer ETFs, gold, or a combination of both, depending on their goals, strategies, and risk preferences. Here’s how various investor profiles might align:

• Growth-focused investors: ETFs often appeal to those aiming for capital growth over the long term, given their broad diversification and market exposure.
• Risk-averse or inflation-wary investors: Gold may attract those seeking a hedge against economic instability or inflation, offering a sense of security.
• Balanced investors: A mix of ETFs and gold could work well for those who want to balance growth opportunities with risk management.
• Income-focused investors: Investors looking for income may prefer ETFs that pay dividends, as gold doesn’t generate income.
• Short-term investors: Gold might suit those focused on short-term preservation of wealth during volatile market conditions. ETFs, on the other hand, are typically better for long-term strategies.
• Diversification seekers: Investors aiming to spread risk across asset classes might combine ETFs and gold for broader portfolio stability.

As we’ve said, both ETFs and gold can have unique roles in a portfolio. The choice between them depends on your financial goals, risk tolerance , and strategy. For some, combining both in a portfolio can provide balance and diversification.

How can ETFs and gold complement each other in a portfolio?

ETFs and gold have their unique qualities, but combining them can enhance diversification and potentially improve portfolio resilience. Here’s how they work together:

• Broader risk management: As mentioned, ETFs provide exposure to various assets, while gold can potentially protect a portfolio against inflation or economic uncertainty.
• Performance in different markets: Gold may hold value during market downturns, while ETFs can drive growth in stable or rising markets.
• Balancing growth and stability: Pairing ETFs with gold can potentially help balance a portfolio’s risk and return, especially over the long term.

Based on the above, some example scenarios where both can benefit a portfolio include:

1. Market volatility: A mix of ETFs and gold can reduce the impact of sudden market swings, potentially offering more consistent returns.
2. Inflation concerns: Gold can preserve wealth during inflationary periods, while ETFs provide exposure to assets that may benefit from economic growth.
3. Long-term planning: Combining ETFs and gold may suit investors aiming to balance growth with wealth protection over decades.

ETFs, gold, and your goals

Both ETFs and gold have value in a portfolio. They offer unique benefits that appeal to various types of investors and play distinct roles in managing risk and achieving growth. Understanding your objectives and risk profile is key to deciding whether one, the other, or both fit into your portfolio.

The choice isn’t about finding a single “right” answer but selecting what aligns best with your financial strategy. Whether you’re focused on growth, stability, or a bit of both, you now have the knowledge to help you make an informed decision.

Remember, investing is a journey, not a race. Every step you take builds your financial future, whatever investment option you choose. Stay focused on your goals, adapt as needed, and trust that each choice brings you closer to achieving the future you envision.

Happy investing!