What Are Gold ETFs and How Do They Work?

Q: Long-Term Investing

This strategy involves holding gold ETFs over an extended period to capture gold’s long-term appreciation and hedge against inflation. Long-term investors typically buy and hold gold ETFs to diversify their trading accounts and reduce overall risk.

Q: Hedging

Certain investors use gold ETFs to hedge against market volatility, currency fluctuations, and economic uncertainties. By including gold ETFs in their trading account, they could offset potential losses from other investments during turbulent times.

Q: Short-Term Trading

Active traders buy and sell gold ETFs based on short-term price movements and technical signals. This strategy requires careful monitoring of market trends and quick decision-making to take advantage of price fluctuations.

Gaining insight into the dynamics of gold ETFs is essential for navigating today’s investment landscape, as they offer unique possibilities and challenges for investors.

By Arjel Vajvoda

Edited by Danéll Theron

Published November 20, 2024.

a stack of coins with the letters etf spelled on them

In this article

Examples of Major Gold ETFs in the Market

Physically-Backed Gold ETFs vs. Futures-Based Gold ETFs

Understanding Gold ETFs

Potential Benefits and Drawbacks of Gold ETFs

A gold ETF (exchange-traded fund) is an investment fund traded on stock exchanges, designed to track the price of gold. Unlike mutual funds, which are actively managed and may invest in a variety of instruments, gold ETFs typically hold physical gold or gold futures to mirror the spot price of gold. Compared to physical gold, gold ETFs offer greater liquidity and ease of trading without the need to store physical bullion.
Note: Fortrade offers the ability to trade the price changes of gold ETFs with CFDs and NOT to buy/sell ownership of the ETF itself. All the information in this blog is purely educational and should not be considered as advice
» Learn more about trading with a Fortrade account﻿
Examples of Major Gold ETFs in the Market1. SPDR Gold Shares (GLD)SPDR Gold Shares is one of the largest gold ETFs, holding physical gold in secure vaults. It offers a relatively low expense ratio of 0.40% and high liquidity, making it appealing to those seeking direct exposure to gold prices. The fund is actively traded, resulting in tight bid-ask spreads and ease of entry and exit for investors. Its current net value as of August 2024 is $65 billion, with a YTD daily total return of 16%.
 
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2. iShares Gold Trust (IAU)iShares Gold Trust is another well-known gold ETF that holds physical gold. It is similar to GLD but typically has a lower expense ratio of 0.25%, making it potentially a more cost-effective option for long-term investors. However, its net value is lower, currently at $30 billion, meaning that there’s less overall liquidity. Similar to GLD, its YTD daily total return is 16%. 
 
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3. VanEck Vectors Gold Miners ETF (GDX)Unlike GLD and IAU, which invest in physical gold, GDX invests in stocks of gold mining companies. This ETF offers exposure to the broader gold industry rather than the commodity itself, which may lead to higher potential returns but also involves increased risk due to the volatility of mining stocks. Its performance varies from both IAU and GLD, with its current YTD daily total return at 14% and an expense ratio of 0.51%. Additionally, GDX pays out a dividend with a yearly yield of 1.32%.
 
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» Need more examples? See our list of gold ETFs﻿
Physically-Backed Gold ETFs vs. Futures-Based Gold ETFsPhysically-Backed Gold ETFsPhysically-backed gold ETFs hold actual gold bullion in secure vaults, and each share of the ETF represents a specific amount of physical gold. These ETFs aim to directly reflect the price of gold by maintaining a reserve of physical gold that backs the shares, allowing traders to feel more secure knowing that their instrument is tied to physical holdings.
This direct backing often results in minimal tracking error, making these ETFs a popular choice for those looking to trade gold without managing the logistics.
Futures-Based Gold ETFsFutures-based gold ETFs invest in gold futures contracts rather than physical gold—these contracts are agreements to trade gold at a future date for a predetermined price. Futures-based ETFs aim to track the price of gold through these contracts but could be influenced by factors like contango and backwardation. These market conditions could cause the ETF’s performance to occasionally diverge from the spot price of gold.
Case Study: Historical PerformanceA comparison of SPDR Gold Shares (GLD), a physically-backed ETF, and ProShares Ultra Gold (UGL), a futures-based ETF, shows differences in performance and risk.
Historically, GLD has closely tracked the spot price of gold with minimal tracking error, while UGL, due to its leverage and futures contracts, has shown higher volatility and divergence from the spot price over long periods.
» Discover how geopolitical events influence financial market volatility﻿
Understanding Gold ETFsGold ETFs aim to mirror the spot price of gold by either holding physical gold bullion or investing in gold futures contracts. The value of the ETF shares is directly linked to the current price of gold in the market, with an occasional discrepancy.
Factors Influencing Price TrackingSeveral factors could influence how closely a gold ETF tracks the spot price of gold:
Management fees: Management fees and operational costs could cause slight deviations from the spot price of gold, as these expenses reduce the net asset value (NAV) of the ETF. 
Market conditions: The supply and demand for ETF shares could potentially impact the price, causing it to trade at a premium or discount relative to the NAV. High trading volumes generally help maintain the ETF’s price close to its NAV, while low liquidity could potentially lead to larger discrepancies.
Tracking errors: Tracking errors could occur when the ETF’s price doesn’t match the price of the underlying instrument, often due to operational factors and market conditions. Fund managers regularly monitor and adjust the ETF to reduce these errors, helping it stay more closely aligned with the spot price of gold.
» Read more about price and tracking in our guide to price-weighted indices﻿
Potential Benefits and Drawbacks of Gold ETFsPotential Benefits
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 High liquidity: Gold ETFs offer ease of buying and selling during trading hours, making it more accessible than physical gold.
 Cost-effective: It generally has lower costs compared to purchasing and storing physical gold, reducing overall investment expenses.
 Diversification: Gold ETFs could potentially protect portfolios during economic downturns, providing a hedge against market volatility.
 Regulation: Gold ETFs are regulated by financial authorities, offering protection against fraud and ensuring compliance. The physical gold backing these ETFs is stored in secure vaults and regularly audited for added integrity.
Potential Drawbacks
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 Liquidity risks: Some gold ETFs may have lower trading volumes, leading to wider bid-ask spreads and higher trading costs, affecting trade execution.
 Regulatory risks: Changes in regulations could impact the operations and profitability of gold ETFs, making it important to stay informed about potential changes.
 Counterparty risks: In futures-based ETFs, the risk of counterparty default may affect the ETF's ability to track gold prices accurately, necessitating an understanding of counterparties' financial health.
 Tax implications: Investing in gold ETFs could lead to higher capital gains tax rates, which may impact investors' after-tax returns.
» Read more about the risks of investing in ETFs﻿
Trading Strategies Involving Gold ETFs
Long-Term Investing
This strategy involves holding gold ETFs over an extended period to capture gold’s long-term appreciation and hedge against inflation. Long-term investors typically buy and hold gold ETFs to diversify their trading accounts and reduce overall risk.
Hedging
Certain investors use gold ETFs to hedge against market volatility, currency fluctuations, and economic uncertainties. By including gold ETFs in their trading account, they could offset potential losses from other investments during turbulent times. 
Short-Term Trading
Active traders buy and sell gold ETFs based on short-term price movements and technical signals. This strategy requires careful monitoring of market trends and quick decision-making to take advantage of price fluctuations.
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» Check out these advanced ETF trading strategies﻿
 ﻿Market Dynamics: The Current Landscape of Gold ETFs﻿The recent decline in gold ETF prices is driven by several factors, including high interest rates, a potentially stronger US Dollar, and fluctuating demand for safe-haven instruments as the global economy shows signs of recovery. However, as of August 2024, rising tensions in the Middle East have led to a rebound in gold prices—and subsequently gold ETFs—signaling renewed global economic uncertainty. Staying informed about these changing market dynamics and macroeconomic shifts is crucial for understanding how they may affect gold ETF performance.
Note: Fortrade offers the ability to trade the price changes of gold ETFs with CFDs and NOT to buy/sell ownership of the ETF itself. All the information in this blog is purely educational and should not be considered as advice. Your decisions should be made on your individual circumstances.
» Learn more about opening an account with Fortrade﻿