How to Start Investing in Gold Using ETFs

Investing in gold is a great way to diversify your portfolio. For example, as inflation hit a 40-year high this year and interest rates rose, both stocks and bonds fell simultaneously. Conversely, gold held its value, falling just -0.27% compared to the 10% loss suffered by the S&P 500 Index.

Gold is viewed as both a store of value and a safe haven asset, making it an investment of choice for individuals seeking safety from geopolitical risk, weak economies, or currency depreciation. Its lower correlation to stocks and bonds makes it a great choice to round out a portfolio.

While Canadians can physically hold bars or invest in gold mining stocks, an easier way might be to buy a gold exchange traded fund (ETF). These funds can hold either physical bars of gold in vaults or a portfolio of gold mining stocks. Let’s look at some funds for each approach!

Physical Gold ETF

iShares Gold Bullion ETF (TSX:CGL) provides access to a vault of precious metals held in escrow with a custodian. Content is audited frequently, and each share of CGL you buy represents a fraction of the pot of gold. As a result, the price of CGL tracks the spot price of gold fairly well.

CGL is currency hedged. Since the price of gold is traded in US Dollars (USD) but CGL is traded in Canadian Dollars (CAD), fluctuations in the USD-CAD exchange rate can cause price volatility. CGL uses a derivative called a futures contract to minimize this, so your returns match the price of gold and aren’t as affected by changes in exchange rates.

In terms of fees, investing in CGL will cost you an annual expense ratio of 0.55%, which will be deducted from your total investment. For example, a $10,000 investment in CGL will cost you about $55 annually in fees. That’s more expensive than the average index fund, but it’s typical for a commodity fund.

Gold Mining ETF

An alternative to physical gold ETFs are ETFs that hold gold mining stocks. Compared to the former, gold mining ETFs tend to have more positive expected returns, but are more correlated to the stock market because their underlying holdings are stocks and not actual gold. This gives them less diversification power.

Still, gold mining ETFs are a great way to invest in gold while investing in stocks. A great option is iShares S&P/TSX Global Gold Index (TSX:XGD), which owns 47 small, mid and large cap gold mining stocks from the Canadian, US and South African markets.

XGD currently pays a strong annual distribution yield of 3.76%, but hasn’t had the best historical performance with a 10-year compound annual total return of -1.22%. The fund is also quite expensive, with an expense ratio of 0.61%, which is slightly higher compared to CGL.