Key Differences Between Investing in Gold Mutual Funds and Gold ETFs

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Gold Mutual Funds and Gold ETFs

An excellent way to achieve portfolio diversification and stability is to invest in gold. That's because gold has long been the safe haven investment from the travails of the dollar.

There are several ways to profit from the yellow metal, including investing in gold mutual funds, gold exchange-traded funds (ETFs), junior gold stocks, and gold options and futures.

Gold mutual funds and gold ETFs are two of the most popular ways to invest in gold, but investors should familiarize themselves with the differences between the two to best meet their individual investment goals.

In fact, according to Morningstar, gold mutual funds that own gold-mining stocks have attracted $358 million in net investment through February - a sharp contrast to 2013, when investors pulled an average of $355 million from the group every two months.

Below is a discussion of these differences between gold mutual funds and gold ETFs.

What Are Gold Mutual Funds?

Gold mutual funds pursue capital appreciation by investing in companies engaged in the mining, distribution, and processing of precious metals like gold. To be considered a gold mutual fund, the fund must have at least 65% of its total assets in precious metal bullion, or in the securities of companies involved with mining or otherwise dealing in precious metal, according to Morningstar.

Gold mutual funds are a great way to profit from gold without owning physical gold. Like any other mutual fund, gold mutual funds are managed by an assigned fund manager. A pool of different shares of stocks or bonds are chosen and looked after by the fund manager.

The mutual fund price doesn't vary during a trading day. It's set at the end of the day, and mutual funds are bought and sold only after that price has been set each day's end.

Some common gold mutual funds are Franklin Gold and Precious Metals Fund Class (MUTF: FKRCX), Vanguard Precious Metals And Mining Fund Investor Shares (MUTF: VGPMX), and American Century Global Gold (MUTF: BGEIX).

What Are Gold ETFs?

Gold exchanged-traded funds (ETFs) are actually a type of gold mutual fund. They are another way to invest in gold without physically holding gold.

ETFs contain a basket of investments, but unlike the mutual fund, they don't trade at the end of the day. Instead, the ETF price is determined by investor demand during the trading day.

The two major gold ETFs that trade in the United States both hold only one asset: gold bullion. These two ETFs are SPDR Gold Trust (NYSE ARCA: GLD) and iShares Gold Trust (NYSE ARCA: IAU).

Gold mutual funds and ETFs have distinct legal structures, trading processes, expenses, and taxation treatment that can make a big difference to investors depending on their goals.

Here's a breakdown of how these two investment tools can work for - or against - your trading style...

Picking the Right Investment Tool for You

Gold ETFs are considered more flexible than mutual funds because shares can be sold or bought at any time. Just like a stock, an ETF can be sold short, bought on a margin, etc. Thus, investors can better take advantage of fluctuating gold prices compared to a gold mutual fund.

On the other hand, when you want to buy or exit from a gold mutual fund, you must wait for the closing net asset value (NAV), usually at 4 p.m. EST. It is computed once every day on the basis of closing market prices.

ETFs are good for investing in a narrow market segment, like the gold production sector specifically. But note that according to Morningstar research, investors in narrowly focused funds are more inclined to trade at inopportune times. Gold mutual funds bring the advantage of professional management, which decreases unintelligent trading.

Gold ETFs are typically lower cost in terms of expenses, because they are operated in a passive manner compared to the more management-intensive mutual funds. But ETF traders do have to pay brokerage commissions, which can ultimately get more expensive than gold mutual funds. So depending on how much trading an investor wants to do, an ETF may be a better or worse choice in terms of cost.

Finally, ETFs tend to be more tax effective than gold mutual funds, because they are able to lessen or outright avoid capital gain distributions.

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Sources:

  • Morningstar
  • Forbes