What is an ETF?

An ETF is an exchange-traded fund, which differs from mutual funds and index funds. ETFs trade similarly to a stock on the stock exchange. Of the three fund types, the ETF has the most fluidity because it is contingent on how much is bought and sold throughout the day. Mutual funds and index funds, on the other hand, have their net asset value calculated at the end of the day. ETFs are funds that own underlying assets, such as stocks, bonds, Gold bullion and certain types of foreign currency, and divides ownership of those assets into shares. Shareholders that have investments in these assets are guaranteed some of the profits that are made in interest or dividends that are paid out.

Ownership of an ETF can be bought, sold or traded easily since the shares are traded publicly on stock exchanges. An important note about ETFs and mutual funds is that shares are purchased on paper, not the physical product. In order to better understand an exchange-traded fund, it is important to know what mutual funds and index funds are.

Mutual funds are professionally handled monies pooled together with other investors to purchase a group of stocks, bonds or other securities. Investors in mutual funds do not own the securities in which they invested. Rather, they only own shares in the funds.

Index funds are mutual funds that are engineered to track or match certain components of market indexes like the S&P 500. They are passive funds that can sometimes outperform a professionally managed mutual fund. Index funds generally cost less to operate and have little overhead.

Both mutual and index funds require a trade commission fee. Net assets held in an ETF is $1.34 trillion. That is compared to the $14.72 trillion invested in other assets like mutual and index funds. An ETF gets its fluidity based on how certain sectors are bought and sold throughout the day, which gives it a distinct advantage over a mutual or index fund. Sectors such as Gold bullion and foreign currency are among the most fluid asset groups in an ETF.

In terms of Precious Metals ETFs, it is important to note that by investing in Precious Metals ETFs you are investing in paper metals products instead of physical Silver or Gold bullion. Owning shares in GLD or SLV does not equate to owning physical Gold or Silver, nor does it mean receiving physical Gold or Silver in return. All returns and dividends are issued in cash. When an investor owns shares in a Precious Metals ETF, there are some factors that can earn them positive gains:

  • Rising Gold prices or other Precious Metals prices
  • Popularity in investing in a Precious Metals ETF
  • Increased supply and demand of metals
  • Metals trending around the world.

Investments in Precious Metals occur throughout the day. Whether it's GoldSilver, Platinum or Palladium, Precious Metals are one of the most popular ETF categories because of the premium and spot prices associated with each metal. There are several Precious Metals ETFs and they all have several thousands, if not millions, invested. Fluidity is an important aspect of any ETF, but more so with Precious Metals due to being purchased and sold by the thousands throughout the day. Trading is much easier because all values are updated by the minute.

While there is much more to learn about ETFs and Precious Metals ETFs in particular, there are staggering differences in paper metals products than physical metals products. The differences between the two are obvious but both versions must be monitored for price and popularity to determine its value.

Investment Market
While an ETF does trade similarly to stocks, they are commodities, so you are not investing in the physical metal itself. There are several categories of Precious Metals ETFs including the main Precious Metals groups of Gold, Silver, Platinum and Palladium. Investors must determine if they want to hold their investments in paper or physical Precious Metals. Investment goals should always be considered before investing in ETFs or physical Precious Metals. 

There are features of an ETF that are vital for investors to acknowledge:

  • Paper trades are more fluid than physical Goldor bullion. ETFs are priced and traded continuously throughout the trading day. In other words, ETFs are a popular commodity for those who desire to trade quickly if they so desire. This takes vigilance and planning to execute the proper strategy. Owning a paper ETF offers a way to invest without any physical ownership.
  • Buy-ins for the ETF are easy to track. Buying into an ETF, regardless of which Precious Metal ETF group, offers an easier track to investment. Because ETFs are contingent on buy-ins throughout the day, investors can track the Precious Metals ETF much like investors can track a stock they have invested in.
  • Multitude of Precious Metals ETFs from which to choose. Much like choosing Silver bullion or Gold coins, there are several varieties of options available in Precious Metals ETFs. Just as an investor is not limited to one Gold bullion or Platinum product, investors have a variety of options in ETFs including Market Vectors Gold Miners ETF (GDX), Velocity Shares Gold (UGLD) and Credit Suisse X-Links Gold Shares (GLDI).
  • Selling is easier but it may not be the right time to sell. Selling a Precious Metals ETF is easy, but because investors can trade throughout the day, it is hard to determine how much more value there is in the product that was invested in. Value can fluctuate quickly. 

Short and long-term investment opportunities exist in any Precious Metals ETF, but investment goals must be considered before buying into paper or physical products. Even though ETFs are easier for buy-ins, there may be much more value in owning physical metals.

There is a historical baseline for Precious Metals prices to track its value. There is no true baseline for an ETF because its value fluctuates as buying and selling continue throughout the day. ETFs are unpredictable products, but before a trader or investors decides on which tactic to approach, examining the historical data of price and value is in order.  

APMEX recommends discussing the pros and cons of investing with a financial adviser or professional.

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