Is it Better to Buy Gold Or Gold ETF?
Gold ETFs do not back their assets with physical gold bullion as is the case with physical bullion, increasing your risk in an economic or financial crisis such as those highlighted by recent HSBC scandals.
Holding gold ETFs remains significantly less costly than transporting, insuring and storing physical gold bars or coins, offering the added convenience of buying and selling with one click in your Demat account.
Benefits
Gold has long been prized as an investment because it offers protection from inflation, currency devaluation and stock market volatility. Investors seek out this form of precious metal investment for its many benefits – not least against inflation itself and currency depreciation, while offering protection from its volatility.
Investors can access physical gold through various methods, including using a broker, online trading platform or having their wealth managers purchase it on their behalf. They may also invest in gold exchange-traded funds (ETFs), which invest in assets related to gold while tracking its price on an exchange market.
Investors can reap the advantages of gold ETFs due to their ease of use and cost-efficiency, but should remain aware of potential pitfalls related to taxes on sales of these collectibles rather than investments, which may reduce overall returns. As with any investment decision, choosing an appropriate gold ETF depends on your portfolio, risk tolerance and budget.
Risks
Gold ETFs offer an effective means to diversify your portfolio, but it’s important to consider their associated risks – which could include high fees, tracking errors and illiquidity. Furthermore, futures ETFs as well as leveraged and inverse gold ETFs may be volatile and difficult to comprehend.
Counterparty risk is another consideration with gold ETFs. This risk exists since you do not actually own any physical gold when purchasing shares in such funds.
Gold ETFs may offer lower upfront fees than their traditional counterparts, yet will often incur ongoing charges such as an expense ratio and trading commissions that must be covered. Therefore, it’s essential that when buying such funds you research which will best meet your needs before selecting one for investment. Upon selling it however, taxes will need to be paid as well.
Taxes
Gold ETFs trade like stocks on an exchange and can be bought or sold any time and any quantity desired, offering low transaction costs and being highly liquid. Furthermore, you can easily track their performance online trading platforms.
Physical gold ETFs, on the other hand, tend to have limited trading volumes and storage costs associated with them. Furthermore, many such ETFs may only be accessible via demat and require higher minimum investments before trading begins.
Physical gold ETFs are taxed differently from other securities because they’re backed by real metal, making them collectibles that require investors who own more than one year to pay the top 28% long-term capital gains rate instead of 15% – this can significantly reduce returns, so be mindful of all tax implications associated with any investment you make; while tax planning might seem tedious at times, it’s an essential component to making sound financial decisions.
Liquidity
Purchase and sale of physical gold can be time consuming and cumbersome, so doing your research to find a reputable dealer is worth your while. Look for one offering competitive yet transparent prices as well as buyback policies and storage solutions.
Gold ETFs offer an effective means of investing in precious metals without the headaches associated with owning and storing bullion coins and bars. But before making your investment decision, do your homework by conducting extensive research into each ETF’s underlying assets, track record for at least five years, expense ratio and liquidity – as this will give you peace of mind when selecting your fund of choice.
Most major brokerages offer ETFs commission-free for trading, typically at lower fees than mutual funds. Investors should check if their prospective ETF pays Securities Transfer Tax (STT), which could be significant depending on its structure; particularly for leveraged gold ETFs which magnify losses as well as gains, they could incur higher STT and short-term capital gains tax rates than other ETFs.
Categorised in: Blog