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.” (Investopedia) Shareholders that have investments in these assets are guaranteed some of the profits that are made in interest or dividends that are paid out.
Buying and Selling ETFs
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: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 of which they invested. Rather, they only own shares in the funds.
Index 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. (Forbes) 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.
Precious Metals 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 Gold, Silver, 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.