Whenever macroeconomic or political instability starts to rear its ugly head, gold ETFs in the UK suddenly get popular. These financial instruments offer investors an indirect method of investing their wealth into the precious metal – an historically safe haven against economic volatility.
But what exactly is a gold ETF? And are they actually a good investment? Let’s break it down.
What is a gold ETF?
A gold exchange-traded fund focuses exclusively on investing investor capital into financial assets and securities related to gold. This includes both the physical metal as well as gold stocks. Both funds and shares can expose you to the gold sector, but ETFs are typically a less risky way to invest in gold.
They first gold ETF emerged in Australia in 2003 and in the US in 2004 in two different forms.
1. Gold commodity ETFs
The fund manager invests shareholder capital into gold bullion, typically coins or bars. Because it holds commodities rather than stocks, this fund is more commonly referred to as an exchange-traded commodity or ETC.
The share prices of these ETCs are highly correlated with the movements of gold spot prices. And ETCs provide a far more convenient way for investors to store their wealth in gold. After all, owning physical gold requires safe storage, which can be difficult and expensive to access. Physical gold can also be harder to liquidate on short notice.
2. Gold mining ETFs
The fund manager invests shareholder capital into high-quality gold mining businesses worldwide.
As businesses produce cash flow, this type of gold ETF has the potential to deliver better performance for investors. However, mining companies are also exposed to several risks, which can make the fund significantly more volatile.
The share prices of these ETFs are partially correlated with the movement in gold prices but are primarily driven by the financial and operational performance of the mining stocks instead.
Top gold ETFs in the UK
Here are a few of the top UK gold ETFs:
| Fund Name | Inception Date | Annual Fee | Description |
| Invesco Physical Gold ETC (SGLP) | 16 Dec 2011 | 0.12% | Tracks the gold bullion spot price1 |
| iShares Physical Gold ETC (SGLN) | 8 Apr 2011 | 0.12% | Tracks the gold bullion spot price using only responsibly sourced gold2 |
| WisdomTree Physical Gold (PHAU) | 24 Apr 2007 | 0.39% | Tracks the physical gold price while complying with established standards3 |
| Gold Bullion Securities (GBS) | 15 Apr 2004 | 0.40% | Tracks the physical spot price while complying with established standards4 |
| VanEck Gold Miners UCITS ETF (GDGB) | 25 Mar 2015 | 0.53% | Invests in a diversified portfolio of world-leading gold mining stocks5 |
Invesco Physical Gold ETC
The Invesco Physical Gold ETC aims to replicate the spot price movement of gold bullion as closely as possible, minus the annual management fees.
The physical gold owned by the ETC is held by JP Morgan Chase Bank in the London Vaults.
iShares Physical Gold ETC
The iShares Physical Gold ETC aims to match the spot price of gold bullion as closely as possible after management fees are taken.
The fund only accepts gold bullion that meets the Good Delivery standards laid out by the London Bullion Market Association. Furthermore, all assets held are classified as responsibly sourced, with its custodian only allocating gold that was mined after 2012.
WisdomTree Physical Gold
The WisdomTree Physical Gold ETF is designed to provide investors with a cost-efficient method of buying gold. It aims to track the spot price movements of gold bullion minus the annual management fees.
The physical gold owned by the ETF meets the Good Delivery standards laid out by the London Bullion Market Association. It’s held by HSBC Bank, which serves as the fund’s custodian.
Gold Bullion Securities
The Gold Bullion Securities ETC attempts to mimic the movements in physical gold spot prices minus annual management fees.
The physical gold owned by the ETF meets the Good Delivery standards laid out by the London Bullion Market Association. It’s held by HSBC Bank, which serves as the fund’s custodian.
VanEck Gold Miners UCITS ETF
The VanEck Gold Miners ETF invests shareholder capital into a diversified portfolio of 49 publicly traded gold mining stocks. The fund is designed to track the performance of the NYSE Arca Gold Miners Index by investing in industry-leading gold mining companies.
Approximately 43% of the fund’s portfolio consists of Canadian businesses, with a further 18% and 13% represented by American and Australian firms, respectively. Its largest holding is Newmont Corp which represents 12.8% of the underlying investment portfolio.
How to invest in gold ETFs
ETFs and ETCs can be bought and sold like regular stocks. And providing the ETF is listed on an exchange to which a brokerage account has access, investors can quickly add these financial instruments to their personal portfolios.
Here are the general steps involved when investing in a gold ETF:
- Based on investment goals, decide whether to invest in a gold mining ETF or gold bullion ETC
- Research the selected funds and clearly understand the fee structure
- Buy shares in the fund with a brokerage account
Are gold ETFs a good buy?
Gold ETFs provide a great deal of convenience to investors. Beyond solving many of the expensive logistical challenges of transporting and storing physical gold, these financial securities are far more liquid. This is why they remain a top choice for gold investors in the UK.
However, there are some caveats. Management fees can slowly diminish wealth, especially if the gold spot price does not increase over time. Furthermore, the share price of an ETF can be subject to higher volatility than the commodity itself, making them a riskier alternative.
Whether a gold ETF is a good buy versus purchasing physical gold ultimately depends on the individual’s financial goals and risk tolerance.