Gold has been valued by people for thousands of years. In today's world, it remains an investment option for many, thanks to gold ETFs. Gold ETFs have made it easier for everyday Aussies to add a touch of gold to their financial mix. No need for a safe or a shovel – just open a brokerage account and you're set.

But the investment world is full of options. So, why should gold ETFs catch your eye? What can they offer that your current lineup of shares and bonds can't?

In this article, we'll dig into the role gold ETFs can play in your portfolio. We'll look at how they work, their potential pros and cons, and how they might fit into your long-term investment strategy. Whether you're an experienced or beginner investor, you might discover a new way to add some shine to your portfolio.

What is gold as an investment?

People see gold as a store of value. Many investors turn to gold in times of economic uncertainty because unlike cash, gold doesn't lose value to inflation.

Gold can also diversify a portfolio as it often moves differently from shares and bonds. This means that when shares go down, gold might go up. This balance can potentially reduce overall risk.

But as we'll discover later in this article, investing in gold (like any investment) isn't without risks.

There are several ways to invest in gold. You can buy physical gold, like coins or bars. You can also invest in gold mining shares. Another option is gold ETFs – which is what we're here to explore.

What are gold ETFs, and how do they work?

Gold ETFs are a way to invest in gold without owning physical gold. An ETF, or exchange-traded fund , tracks the price of gold. When you buy a gold ETF, you buy shares in the fund. These shares represent a portion of the fund's gold holdings. Each unit or share of the ETF represents a set amount of gold. As the gold price moves up or down, so does the value of your ETF units.

Gold ETFs are traded on a stock exchange, like the Australian Securities Exchange (ASX) , during market trading hours. This means you can buy or sell ETF units through your regular share trading account. It also offers a convenient way to invest in gold without the hassle of storing or insuring it.

It's worth noting that while gold ETFs aim to follow the gold price closely, they may not match it exactly. Factors like management fees and market forces can cause small differences.

Are there different types of gold ETFs?

Yes, there are different types of gold ETFs with different characteristics and purposes. The two main types are physical gold ETFs and synthetic gold ETFs.

Physical gold ETFs hold real gold bars. Each share represents a portion of this physical gold. Investors often choose these for the security of owning actual gold. The gold is stored in vaults and managed by the fund.

Synthetic gold ETFs use financial instruments to track the price of gold. These don’t hold physical gold; instead, they rely on contracts and other financial products. This approach can offer flexibility and lower costs. However, it may involve different risks compared to physical gold ETFs.

Other types of gold ETFs are:

• Gold miner ETFs: These invest in companies that mine gold. Their performance can differ from the gold price because of company-specific factors.
• L everaged gold ETFs: These aim to multiply the daily returns of gold. They can amplify both gains and losses.
• Inverse gold ETFs: These move in the opposite direction to gold prices. They're often used by investors who expect gold prices to fall.

Each type of gold ETF has its own risk and return profile. Some may be more suitable for short-term trading , while others suit long-term holding. It's important to understand how each type works before investing.

Consider your investment goals, risk tolerance , and overall portfolio when choosing between different types of gold ETFs. Researching each option can help you make a decision that aligns with your needs.

What are the potential advantages of investing in gold ETFs?

Including gold ETFs in your portfolio can offer several potential benefits. Here are some of them:

Ease of trading

Gold ETFs are easier to trade than physical gold. You can buy and sell gold ETFs through your regular share trading account. This makes them as simple to trade as shares.

Diversification

Gold ETFs can provide diversification . As mentioned earlier, they often move differently from shares and bonds. This means that when shares are down, gold might be up. This can help balance your portfolio and reduce overall risk.

Hedge against inflation

Gold is known to hold its value during inflation. When the cost of living rises, gold prices often climb. Including gold ETFs in your portfolio can possibly help protect against inflation's impact on your investments.

Liquidity

Gold ETFs are traded on the stock exchange. This makes them easy to buy and sell, just like shares. This liquidity means you can quickly convert your investment into cash when needed.

Cost-effectiveness

Gold ETFs can be more cost-effective than buying physical gold. When you invest in gold ETFs, you don't need to worry about storage or insurance costs. The management fees for gold ETFs are therefore typically lower than the costs associated with holding physical gold.

Each of the above benefits can make gold ETFs a useful part of a diversified investment strategy. However, it's important to weigh these benefits against your investment goals, style and preferences. And while these advantages can make gold ETFs attractive, they're not without drawbacks.

What are the potential drawbacks?

Market risk

Gold prices can be volatile. They can rise and fall quickly based on market conditions. This means the value of your gold ETF investment can change rapidly.

Tracking error

Gold ETFs aim to track the price of gold. However, they might not always match gold prices exactly. This difference is known as tracking error. It can impact your investment returns.

Fees and expenses

Gold ETFs come with fees and expenses. These can include management fees and other costs. These fees can reduce your overall returns. It's important to consider these when evaluating them as an investment.

Regulatory risks

Changes in regulations can affect gold ETFs. For instance, governments could theoretically change rules related to gold trading or ETF operations. These changes could impact the performance of your investment.

Complexity

Some gold ETFs, especially those using futures or leverage, can be complex and may not suit all investors.

Understanding these risks can help you decide if gold ETFs fit your investment strategy. Balancing the benefits and risks is key to making an informed choice that works for your portfolio.

How could gold ETFs fit into different investing strategies?

Gold ETFs can serve various purposes in investment strategies , adapting to different goals and risk appetites. As previously highlighted, these funds can offer a way to add gold exposure to a portfolio without the complexities of owning physical metal.

Diversification is a common reason for including gold ETFs. Because gold often moves differently from shares and bonds, it can potentially help balance a portfolio's performance. When shares are struggling, gold might hold steady or even rise, potentially offsetting some losses.

Some investors view gold as a hedge against inflation. When prices are rising rapidly, the value of money typically falls. Gold, being a physical asset, might maintain its value better in these scenarios. Gold ETFs offer a convenient way to gain this potential inflation protection.

In periods of economic uncertainty or market turmoil, gold can be seen as a 'safe haven' asset. Investors seeking stability might turn to gold ETFs to weather the storm. This approach aims to preserve wealth during challenging times, hoping that gold will hold its value when other assets are volatile.

Long-term investors sometimes allocate a small portion of their portfolio to gold ETFs as part of a buy-and-hold strategy. This approach is about maintaining a consistent exposure to gold over many years.

In contrast, more active investors might use gold ETFs for shorter-term trading. They might buy or sell based on their views of economic conditions, currency movements, or other factors that could influence gold prices. However, this doesn’t align with the typical Pearler investor goal to build wealth over the long term. It also requires careful monitoring and carries comparatively higher risks.

Whether gold ETFs are suitable for your strategy depends on your financial situation, objectives, and views on gold's role in the economy. Consider how they might interact with your other investments and align with your overall plan.

Remember, gold prices can be volatile, and ETFs come with their own set of risks. While gold has played various roles in portfolios over time, past performance doesn't guarantee future results. Before incorporating gold ETFs into your strategy, it may be wise to consult with a financial professional who can provide personalised advice based on your specific circumstances.

Which gold ETFs are available on Pearler?

There are several gold ETFs available on the Pearler platform, giving you easy access to gold exposure. Here are a few examples:

• ABRDN Gold ETF Trust (SGOL). This trust holds gold bullion and issues ETFS Physical Swiss Gold Shares in exchange for deposits of gold and distributes gold in connection with the redemption of baskets of ETF shares.
• iShares Physical Gold ETF (GLDN). The fund's investment portfolio concentrates primarily on gold commodities. It aims to provide investors with the performance of the spot price of gold, before fees and expenses.
• Goldman Sachs Physical Gold ETF (AAAU). This gold ETF aims to provide investors with an opportunity to invest in gold through shares. The gold is securely stored by Gold Corporation.
• Franklin Responsibly Sourced Gold ETF (FGDL). This ETF seeks to hold only responsibly sourced gold in its allocated account.

What should investors consider before investing in gold ETFs?

Before investing in gold ETFs, it's important to consider several factors.

• Consider your investment goals. Are you looking for long-term growth, stability, or a hedge against inflation?
• Assess your risk tolerance. Gold prices can be volatile, and gold ETFs can experience significant price swings. Ensure you're comfortable with the level of risk associated with investing in gold ETFs.
• Examine the costs and fees associated with gold ETFs. These can include management fees, trading costs, and other expenses. Higher fees can eat into your returns, so it's important to understand what you'll be paying.
• Decide if you're investing for the short term or long term, as this can affect your choice of ETF.
• Compare gold ETFs to other ways of investing in gold, like physical gold or gold mining shares. How do each of these options align with your investment strategy?

Ultimately, whether gold ETFs have a place in your portfolio is a personal decision. Understanding their role and potential impact can help you decide if they’re the right fit for you.