Investing in ASX gold ETFs

What are ASX gold ETFs?

They're a type of exchange-traded fund (ETF) that invests in gold (either directly or via futures contracts). The aim of a gold ETF is to provide investors with a similar return to what they would receive if they actually bought the physical gold themselves. 

A gold ETF provides a great alternative to buying physical gold bullion directly. For one thing, you don't have to go through the hassle of arranging somewhere to store your gold and pay the associated storage costs. 

And – perhaps more importantly – gold ETFs make investing in gold easy regardless of your budget. ETFs trade on the stock market like shares, meaning you can easily buy them through your existing broker. 

Many new digital trading platforms even allow investors to buy fractions of shares. So you can now start investing in gold with as little as a few bucks.

In this article, we focus exclusively on ETFs that invest in gold directly. But there are also other ETFs that invest in other gold stocks, like gold mining companies. Given these companies rely heavily on gold for their revenues, their prices will often also tend to move with the gold price. 

However, many other idiosyncratic risks are associated with investing in a gold miner or other gold stock that can cause their share prices to deviate (sometimes significantly) from the price of physical gold bullion.

A brief introduction to gold

What is so special about gold, anyway?

Well, gold is just about the only asset to have remained valuable throughout all of history. A medieval king wouldn't have had the foggiest idea of an interest rate swap, but you can bet his crown was made of gold (or if it wasn't, he sure wished it was).

This attribute makes gold the most popular safe haven asset around. When other financial markets are tanking, investors will flock to gold because they know it will always be valuable – even in a major crisis. So, having some gold in your portfolio can help stem your losses in a recession or bear market.

Although, keep in mind that because gold is one of the least risky assets to own, it likely won't offer anywhere near the same returns as equities in a bull market.

A brief introduction to ETFs

Exchange-traded funds (ETFs to their friends) are pooled investment vehicles. This basically means an ETF fund manager collects money from many investors and then uses that capital to make investments, usually according to a predetermined strategy or fund mandate. 

Many ETFs are passive funds that track a particular benchmark or index, like the S&P/ASX 200 Index (ASX: XJO). In this case, the fund manager would invest the fund's capital in all the shares on the chosen index, weighted according to their market capitalisations. 

The fund would then rebalance periodically to ensure its holdings accurately reflect the makeup of the benchmark index. This should ensure the fund's returns closely match the returns of the overall index.

ETFs can be set up to track all sorts of different benchmarks, including the returns of commodities like gold. Rather than investing the fund's capital in shares, the fund manager of a gold ETF would buy gold – either physical bullion or gold futures contracts. As the ETF is backed by gold, the fund's unit price should be highly correlated with the gold price.

How to invest in ETFs in Australia

The great thing about ETFs – and one of the key things that distinguishes them from mutual funds – is they trade on the stock market like ordinary shares. 

This means you can buy and sell units in an ETF through your regular broker. All you have to do is just search for the fund ticker and place your trade.

What about international funds?

Many brokers now give you easy access to overseas markets – particularly the US markets via the NASDAQ and New York Stock Exchange. This makes it easier than ever to invest in international funds.

There are quite literally thousands of ETFs that trade on the US share markets. Many of these funds follow investment strategies that may not be offered by the limited number of funds listed on the ASX. This makes investing in international funds a great way to diversify your portfolio further.

However, before you invest in overseas ETFs, take note of the additional fees your broker may charge for international transactions. These can quickly add up and eat into your returns. 

Also, remember that you take on foreign exchange risk when you invest in US stocks. If the value of the US dollar deteriorates against the Australian dollar, this can also erode your returns.

Why invest in gold ETFs?

As we've already discussed, gold has some unique characteristics that distinguish it from other assets. Most importantly, gold is a safe haven asset, which means it tends to preserve its value even when most other assets are plunging. This can make it an ideal defensive asset to hold if you fear there might soon be a recession or a market crash.

In fact, it makes sense to always have at least a little gold exposure in your portfolio, as it can help smooth out the volatility from riskier assets you might hold, like growth stocks or cryptocurrencies.

Top gold ETFs on the ASX

You have a few options available if you want to invest in ASX gold ETFs. 

The funds listed below are all backed by physical gold. This means when you invest in these funds, you're buying an ownership stake in a pile of gold stored in a vault somewhere. In fact, for an extra fee, some of these funds will even let you redeem your units for actual gold bullion.

Some commodity ETFs invest in futures contracts rather than the physical commodity. These are often referred to as 'synthetic' commodity ETFs because they (technically) track the price performance of futures markets rather than the underlying asset price. 

Bear this in mind when investing in any commodity ETFs, as sometimes the returns on synthetic ETFs can diverge from the spot price of the underlying commodity. So, you must ensure you understand exactly what asset you're being exposed to.

Global X Physical Gold ETF

This is the largest gold ETF on the ASX, with a total fund size of more than $2.5 billion. As the name suggests, it is backed by physical gold, which is stored in the JPMorgan Chase Bank vaults in London.

The fund charges an annual management fee of 0.4% per annum, which means you would pay just $4 for every $1,000 invested in the fund each year. It is also possible to redeem your units in the fund for gold bullion (for an extra fee), although you would need to first open an account with a gold bullion dealer.

Perth Mint Gold ETF

The Perth Mint Gold ETF is also backed by physical gold, which is held by the Perth Mint in Western Australia. The fund manages about $650 million in gold investments, making it far smaller than the Global X Physical Gold ETF. However, it charges a much lower management fee of just 0.15% per annum, making it a cheaper option than its larger rival.

It also allows you to redeem your units for gold in a Perth Mint depository account, although you would then need to pay ongoing storage fees.

BetaShares Gold Bullion ETF 

The BetaShares Gold Bullion ETF is also backed by physical gold stored at the JPMorgan Chase vaults in London. In addition to tracking the price of gold, the BetaShares Gold Bullion ETF also tries to hedge against movements in the AU/US exchange rate to reduce some of the volatility in its market price.

It is the smallest of these gold ETFs, with about $450 million in net assets. It also charges the highest annual management fee (0.59%). However, its return over the past 12 months has been lower than other ASX gold ETFs, likely because of the impacts of the currency hedge.

Pros and cons of investing in gold ETFs

We've already discussed many benefits of investing in gold, the main one being: 

Value preservation: Gold ETFs tend to preserve value over time, meaning they can be an ideal defensive investment in a bear market or a market crash. Because of this, they can also be a good hedge against inflation, preserving the real value of your investment.

However, there are some drawbacks to investing in gold ETFs. 

Low returns: Because gold is low-risk, it is also low-returning, which means you could miss out on growth opportunities by holding too much gold in a bull market.

Check your investment: Also, as we touched on earlier, when investing in gold and other commodity ETFs be mindful of whether the fund is investing its money in the physical commodity or futures contracts, as this can affect its returns. 

Management fees: And be wary of the management fees charged by ETFs – some charge lower fees than others, so shop around before committing.

How have global events impacted?

The gold price, and the price of gold ETFs, have risen significantly in recent years. A seemingly never-ending series of international conflicts and crises have caused investors (especially large institutional investors and hedge funds) to flock to safe-haven assets. 

The gold price peaked in mid-2020 at the height of the COVID-19 pandemic and has remained elevated ever since. High inflation, global recession fears, and the war in Ukraine have continued to wreak havoc on financial markets, particularly equities, which has kept investor demand for gold strong.

Are gold ETFs a good investment?

Having some gold exposure in your portfolio is always a good idea, as this can help lower your overall risk. ASX gold ETFs are a cost-effective way for any investor to add some gold to their portfolio. 

ETFs eliminate the need for investors to store the physical gold themselves and can deliver similar returns to those you'd earn from owning the commodity directly.