If you are interested in the gold market but don’t want to be burdened with hiding physical bars of gold under your bed, learning how to invest in gold ETFs can be a cost-effective, secure, and liquid alternative to consider.
Because gold has proven to be a strong store of value over the years, investors have embraced it as an inflation and deflation hedge (protection), a haven (place of safety) in periods of economic uncertainties and fluctuations, and a means for portfolio diversification.
For those learning how to invest in gold in the UAE, you will find multiple options to consider – gold bullion, gold stocks, gold mutual funds, gold futures and options, and gold mutual funds.
However, gold exchange-traded funds (ETFs) have proven to be the most valuable option for retail investors given their accessibility, transparency, liquidity, and cost-effectiveness.
In this article, we will consider:
- What is a gold ETF?
- Why should you invest in gold ETFs?
- How to invest in gold ETFs in the UAE
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1. What is a gold ETF?
In general, an ETF is a basket of securities that tracks the performance of an underlying market index.
As a basket, an ETF contains numerous assets that belong to a single asset class (stocks, bonds, gold, REITs, etc.). It tracks the performance of an index by buying the same assets that are in that index.
Unlike mutual funds and index funds, ETFs are traded on the stock exchange market during regular trading hours.
A gold ETF is an ETF that invests in physical gold (gold bullion) or gold stocks.
Gold bullion is tangible gold and can be in the form of gold bars, gold coins, and gold jewellery. On the other hand, gold stocks are equities of companies involved in gold mining, production, and distribution.
If an ETF invests in physical gold (let’s call this gold ETF bullion), then it is tracking the price movement of the underlying yellow metal (physical gold) it owns. SPDR Gold Shares is an example of such an ETF. One gold ETF unit is often equal to one gram of gold.
On the other hand, if it invests in gold stocks (let’s call this gold ETF stock), it will track the performance of an underlying gold index. VanEck Vectors Gold Miners ETF, which tracks the NYSE Arca Gold Miners Index, is an example of this.
When an investor buys a share of a gold ETF, that share represents exposure to all the underlying assets contained in the ETF. So, if an ETF holds physical gold, the investor now has exposure to the gold market even though they have not held any physical gold (the gold is held securely by the ETF).
Similarly, when an investor sells their shares in an ETF, they will not necessarily receive physical gold. They will usually receive the monetary value of the shares they have sold. However, as we will see, some gold ETFs provide the option to deliver physical gold when an investor sells their shares.
If the gold ETF invests in gold stocks only, then the delivery of physical gold won’t be an option. Instead, the purchase and sale of shares will only involve monetary transfer though the value of the ETF will be correlated to the price of gold.
2. Why should you invest in gold ETFs?
But why should you purchase gold ETFs instead of the other ways to invest in gold?
Gold ETFs vs gold bullion
If you buy gold bullion, you will have to worry about securing it. Most buyers will take out insurance, which is an extra cost.
Talking about costs, you will also have to pay for the physical delivery of gold. Even the price you are paying for them already contains a premium (making charges) reflecting the cost of production and packaging.
Furthermore, if you are buying gold bars, there is an illiquidity problem. If you only need $1,000 and you have a gold bar worth $10,000, there is no way to sell a tenth of it.
Gold ETFs don’t have these issues. The gold bullion is held securely in a vault by the asset management company (AMC) behind the fund, there is no delivery cost when you purchase shares in the ETF, and you can buy and sell ETFs on the stock exchange market just like you will buy stocks.
Gold ETFs vs gold stocks
While buying gold stocks is an easy way to get exposure to the gold market, buying individual stocks makes diversification difficult.
Diversification (putting your eggs in many baskets) is the best way to reduce the risk of your portfolio. It requires that you hold multiple stocks that are not positively correlated (their prices don’t move in the same direction) or are less positively correlated (they may move in the same direction but not at the same pace).
Source: Corporate Finance Institute
With individual stocks, you might have to buy 5 or 10 gold stocks before you can get an ideal amount of diversification. In contrast, a single ETF like the VanEck Gold Miners ETF mentioned above tracks 57 different gold stocks (including small-cap and large-cap companies).
The same money you will use to buy a share in one gold company will give you exposure to 57 of them (for example) if you buy a gold ETF stock instead.
Gold ETFs vs gold mutual funds
Both gold ETFs and mutual funds provide diversification benefits to investors interested in gold stocks.
However, gold ETFs have the following advantages over gold mutual funds:
- Cost: Mutual funds are actively managed which leads to high management expenses that are passed on to investors as high expense ratios.
On the other hand, ETFs are mostly passively managed and their low management fees result in a low expense ratio.
Also, ETFs do not charge entry and exit loads (commissions charged by mutual funds to pay intermediaries) on transactions.
In 2022, the average expense ratio of ETFs was 0.16% while that of mutual funds was 0.66%, according to data from the Investment Company Institute, an association of investment funds.
- Taxes: The active management of mutual funds results in more taxable events than ETFs, which means more capital gains tax liability.
Furthermore, if you hold your ETFs for a long time (a year or more), you will be liable for long-term capital gains tax whose rate is lower than short-term capital gains tax.
- Transparency: ETF managers are mandated to disclose their holdings to investors. Mutual fund managers don’t have the same requirement.
- Liquidity: You can only buy and sell shares of a mutual fund at the end of trading hours. In contrast, you can buy and sell shares of an ETF during trading hours.
- Accessibility: Unlike mutual funds, you can buy a fraction of a share of an ETF. If an ETF is valued at $100 per share and you only have $50, you can buy 0.5 shares. This makes ETFs more accessible to retail investors.
- Minimum investment: Similarly, while mutual funds require a minimum investment amount, you can start investing in ETFs with whatever you have.
Gold ETFs vs gold futures and options
Gold futures and options (derivatives) provide leverage which gives investors greater exposure beyond their capital. For example, investors can take a $10,000 position with just $1,000 of their own money – a 10x leverage.
Gold derivatives have the potential to increase investors’ profits and many have also used them as a way to reduce risk.
However, derivatives are complex securities and you will need some level of experience and expertise to gain their full benefits. Gold ETFs, on the other hand, can bought or sold by investors with relatively less experience.
3. How to invest in gold ETFs in the UAE
Now that we know what gold ETFs are and why investors should prioritise them, let’s focus on how to invest in gold ETFs in the UAE.
Sarwa Trade is an investment and trading platform in the UAE where you can invest and trade in gold ETFs.
Whether you are an investor with a long-time horizon and a systematic investment plan (SIP) or a trader seeking income from short-term price movements (often driven by interest rate variations), Sarwa Trade provides all you will ever need to buy and sell gold ETFs.
Currently, there are 7 popular gold ETFs that you can buy or sell on the Sarwa Trade app. Below are the details of these funds as of March 13, 2024.
- GLD (SPDR Gold Trust):
- Launch year: 2004
- AUM (assets under management): $54.17 billion
- Average trading volume: 6,589,925
- Expense ratio: 0.40%
- 3-year daily total return: 7.35%
- USP (unique selling proposition): The largest physically backed gold ETF in the world
[Side note: Past performance does not guarantee future performance]
- GLDM (SPDR Gold MiniShares):
- Launch year: 2018
- AUM (assets under management): $6.37 billion
- Average trading volume: 2,791,410
- Expense ratio: 0.10%
- 3-year daily total return: 7.63%
- USP: One of the lowest expense ratios in the market
- IAU (iShares Gold Trust):
- Launch year: 2005
- AUM: $25.6 billion
- Average trading volume: 5,242,995
- Expense ratio: 0.25%
- 3-year daily total return: 7.47%
- USP: One of the most liquid gold ETFs
- SGOL (abrdn Physical Gold Shares ETF):
- Launch year: 2019
- AUM: $2.71 billion
- Average trading volume: 2,731,101
- Expense ratio: 0.17%
- 3-year daily total return: 7.60%
- USP: Lower than average expense ratio
- OUNZ (VanEck Merk Gold Trust):
- Launch year: 2014
- AUM: $789.02 million
- Average trading volume: 1,031,495
- Expense ratio: 0.25%
- 3-year daily total return: 7.50%
- USP: Permits physical gold redemption
- AAAU (Goldman Sachs Physical Gold ETF):
- Launch year: 2018
- AUM: $594.25 million
- Average trading volume: 2,089,163
- Expense ratio: 0.18%
- 3-year daily total return: 7.56%
- USP: Permits physical gold redemption
- BAR (GraniteShares Gold Shares):
- Launch year: 2017
- AUM: $928.22 million
- Average trading volume: 698,158
- Expense ratio: 0.17%
- 3-year daily total return: 7.57%
- USP: Expense ratio is lower than average
As we continue to add more gold ETFs to Sarwa Trade, our goal is to make it easier for you to diversify your investment portfolio and enjoy the risk-reducing benefits of gold in a way that is accessible, transparent, cost-effective, and liquid.
But why should you choose Sarwa Trade?
Below are the key advantages that make us a unique option for those seeking how to purchase gold ETF online in the UAE:
- Simple and intuitive platform: Sarwa Trade is simple to use and pleasing to the eyes. The interface is easy to navigate and beginners can start investing and trading with little to no guidance.
You can also monitor your portfolio in real time and get access to market reports and news that will help your decision-making.
- Competitive prices: Sarwa Trade charges the higher of $1 and 0.25% of the value of your purchase and sale orders as commission. This price is lower than the average brokerage fees charged by stock brokers.
- Security: Sarwa is regulated by the ADGM Financial Service Regulatory Authority which means we adhere to the highest compliance standards. Our website and app are also protected with 256-bit encryption to keep your money and data secure.
- No minimum balance requirement: A dollar is all you need to start online trading of and investing in gold ETFs.
- Fractional trading: If you can’t buy a share of an ETF, you can buy a fraction of a share. You can also buy or sell by dollar amount instead of number of shares.
- Zero international transfer fees: We offer free AED transfers to and fro your Sarwa trading account.
- Instant deposits: We process deposits immediately so you can start purchasing without delay.
[Do you want to buy gold ETFs in the UAE? Sign up for Sarwa Trade for accessible, fast, and cost-effective investment in and trade of your favourite gold ETFs.]
Takeaways
- Investors have found gold to be a valuable investment option for portfolio diversification, inflation and deflation hedge, and protection from market risks during economic uncertainties.
- While there are various ways to invest in the precious metal, gold ETFs provide unique advantages like accessibility, transparency, and cost-effectiveness.
- Gold ETFs can either invest in gold stocks or gold bullion.
- Sarwa Trade is a low-cost, accessible, and easy-to-use option for those seeking how to purchase gold ETF online in the UAE.