Exchange-traded funds (ETFs) are passively managed index funds that mirror a specified index through a pre-packaged group of stocks. Generally, ETFs are a great investment solution for investors who want to diversify their portfolios because they allow the acquisition of different securities, which can be traded individually. ETFs can be traded at any market price anytime during a trading session, offering flexibility at a low cost. Besides, ETFs are a powerful investment vehicle against market volatility.
Why Investing in Gold
Gold has historically been a calculated, alternative investment asset class that can hedge risk against inflation, depreciating dollar and uncertain economic and political conditions. Studies show that gold is the most stable investment vehicle against market volatility compared to stocks, fixed income securities and commodities. Besides, the value of gold has remained unaffected unlike currencies that have experienced sharp fluctuations.
Gold can reduce the risk of volatility in a portfolio for a given level of returns because macro- and micro-economic factors that have a major impact on most asset classes do not affect the price of gold. For instance, right after 9/11, stock markets crashed around the world, but the price of gold increased by 33% in the London Stock Exchange. This shows that gold is an investment vehicle that incurs no credit risk.
Advantages of Gold ETFs
Gold ETFs provide investors with the opportunity to invest in gold with a small amount of money. Most gold ETFs require a small initial investment and allow investors to buy in portions of an ounce. This is a really beneficial deal given that, nowadays, the price of an ounce of gold is not affordable to anyone.
By owning gold ETFs instead of gold, investors eliminate the logistics issues including insurance, storage, moving, and reselling, among others. Investors do not have to deal with any problems associated with owing the physical metal, but they can acquire a large amount of gold by issuing the equivalent value in shares. The price of shares moves up or down with the price of gold bullion. By trading like stocks, gold ETFs eliminate the costs incurred by the dealer markups when investors buy gold and a potentially lower actual cost per ounce when they sell.
Why Gold ETFs Are on a Rush?
Currently, as emerging economies and mainly Asian economies grow, they stock up gold bullion. China, India, The Philippines, Saudi Arabia, Sri Lanka and Bangladesh have gold reserves and of course Russia. Although they buy conservatively in order to be able to handle the global gold supply, still the trend for gold investing is favorable.
However, because economic conditions globally are quite unstable, investors prefer ETFs to hedge against market volatility. According to Tom Lydon, the author of “The ETF Trend Following Playbook: Profiting from Trends in Bull or Bear Markets with Exchange Traded Funds”, since 2009, there has been a notable shift of investors toward the gold rush through ETFs, which is mainly explained by three major factors: (1) inflation concerns, (2) bearish stock markets, and (3) low 10-year treasury yields that drive investors into buying government debt.
Why Investing On The Gold Rush Through ETFs?
As it seems, gold investors are becoming suspicious that the timing is perfect to cash in on historic gold prices as fund inflows are increasingly higher every Friday. For instance, the inflows of the Market Vectors ETF Trust Market Vectors Gold Miners (NYSE: GDX) have increased 27% in 2010. Similarly, the inflows of the SPDR Gold Trust ETF (NYSE: GLD) have increased 35 % in 2010 (Source: TrimTabs Investment Research). Apparently, owning shares than gold bullion is more attractive because, traditionally, gold ETFs and particularly of mining companies, provide considerably higher returns than trading gold. Hence, given the turbulent economic environment in the European Union, but also the recession that the U.S. economy has suffered recently, joining the gold rush through ETFs seems like the perfect solution right now.