Exchange traded funds or ETFs are like an investment funds or mutual funds that are traded on a stock exchange. ETFs hold assets, such as commodities, stock and bonds and act as a security that tracks an index or a basket of assets like an index fund. These funds are traded on a stock exchange just like stocks and bonds. Its price changes many times in a single trading day as they are purchased and sold. In 2004, the first ETF specifically developed to track gold prices was introduced in the United States of America. It was sold as a cheap alternative to buy physical gold and gold futures. Right from the beginning of its introduction, the ETF is considered as a widely accepted alternative.
Many investors take the gold ETF as a convenient option to invest in gold without exposing themselves to a risk of physically purchasing precious metal or gaining practical understanding about gold futures. However, they fail to realize that the price to trade these instruments may exceed their level of convenience and that trading gold futures would be a wise alternative under the right circumstances. There are many disadvantages of investing in gold ETFs that are way beyond the routine fluctuation of gold prices, such as non-gold related market risk, tax implication and additional fees.
Investment in the gold ETF that tracks prices of gold, does not make an investor the actual owner. His ownership in an ETF is considered as collectibles under IRS law. Therefore, long term investment in gold ETFs is subject to comparatively higher capital gains tax. In order to avoid tax implications, many investors take their money out of ETFs before 12 months, which eliminates their chances to earn profit from multi-year gains that may arise in gold. When an investor invests in gold ETFs that track gold prices, he doesn’t know that these ETFs are exposed to a host of a company risk that has nothing to do with the actual gold value fluctuation. Therefore, it is very important to seek advice of Your Personal Financial Mentor before investing in a precious metals market because he guides you which instruments are beneficial for you, keeping in mind your financial goals.
There is an inherent limitation in a gold ETF that it’s a diminishing investment. Gold itself cannot generate income but still there are expenses that need to be covered. Therefore, management of ETF is allowed to sell gold in order to pay off these expenses. However every time they sell gold, it becomes a taxable for an investor which means that a fee for managing fund along with marketing and sponsor fees, must be paid off by liquidating the assets. But the risks attached with the gold ETFs are not there in gold futures. Gold futures are straight forward as compared to gold ETFs. Investors can trade in gold whenever they want and no management fee is charged. Tax is usually split between long term and short term capital gains, investors have a right to own the underlying gold and there is no third party involved to decide on the investor’s behalf.
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Categories: Precious Metals Market