CHICAGO (Reuters) – Short of stockpiling bullion in your basement, an ETF is the most cost-effective vehicle for owning gold. But you cannot just pick any fund out of the available list of seven bullion-based funds and expect it to perfectly track the price of gold and offer the lowest expense ratio.9
First of all, no exchange-traded fund will track the price of gold perfectly because returns are offset by costs — management fees and brokerage costs to buy them. Gold ETFs vary in fees, with the average annual expense ratio for the category at 0.54 percent, although you can find a fund charging as low as 0.25 percent. You need to weigh carefully what’s important to you: The size and liquidity of the fund or annual expenses. Which fund you buy depends upon how you plan to own it.
As I have mentioned in the past, gold is not a perfect investment. Many pundits legitimately claim gold is a shadow currency because major banks, traders and governments buy it to hedge against currency devaluations. When the dollar gains against other currencies or consumer confidence comes back in the United States or Europe, though, gold will not shine. Rising U.S. interest rates in the U.S. will also hurt the metal’s price.
Since gold is so volatile, do not invest more than 10 percent of your portfolio in it. You would need look no farther than last Friday for an example of the risk; gold fell nearly 2 percent — its biggest one-day drop in three months.
Two funds are leaders in terms of size and visibility: the SPDR Gold Trust and iShares Gold Trust. These two ETFs come up most often in lists of recommended funds.