An exchange traded fund is simply a kind of mutual investment fund and such an entity, i.e. they are traded in stock exchanges on the commodity market. But where do these funds come from? And how do they differ from, say, ordinary mutual funds?
Classifications of ETFs
Exchange traded funds are generally classified as equity indexed funds, commodity funds or real estate exchange traded funds. Equity indexed funds include everything that has to do with putting money into an account that earns interest: bonds, stocks, money market accounts, certificates of deposit (CD’s) and more. They also include other types of invested funds: real estate funds, bond funds, money market funds and others. This can get confusing: if you want to buy stock from the New York Stock Exchange for example, you can call your broker and ask him what are some good mutual funds to put money in, and he will walk you through the list of exchange traded funds. But if you want to buy gold coins, he wouldn’t be able to tell you which one to buy – there are so many kinds!
If you choose a stock index fund instead, you’re choosing something that you believe is worth a certain amount of gold per share. So, let’s assume you’re going to invest in Gold ETFs. These are like regular funds except that instead of buying individual shares, you buy whole shares of a company. Gold ETFs track the movements of gold prices and the prices of mining companies whose stocks you might want to invest in, so if the price of gold moves up, so does your fund.
There are also many kinds of these funds, and it can be confusing when you’re looking at them. For example, you might think you’re investing in a 401k plan or fund that invests in Gold ETFs, but maybe you want to buy Gold bullion funds or a gold IRA instead. Or perhaps you want to invest in a fund that invests in Gold mine shares. One thing you should know before you buy any sort of gold fund, however, is that you must have an appropriate amount of gold in your possession, or you won’t qualify for the fund. This usually requires a minimum balance in gold coins.
There’s no way to determine how much gold you need. If you don’t own any, they will never buy it for you. If you do own some, you must also have a margin account or you can’t buy the fund. This means that you have to either have cash available or have a bank account that contains more than the minimum amount. If you don’t have either of those, you might as well not even bother with this type of fund because the chances of you owning more than one ounce of gold when you open your account are slim to none.
So, once you’ve decided what kind of Gold ETF you’d like to buy, you need to decide which shares you’re going to buy. There are a couple of different methods of doing this. You can either opt for Gold ETF shares that you can purchase directly from the fund itself or you can invest through a brokerage. Both of these methods work, but there are advantages and disadvantages to each one. And whichever method you choose, you should keep in mind that if you don’t own the shares directly from the fund you won’t be able to sell them to you until the fund has sold them to the public.
Buying ETF shares directly from the fund means that you won’t have to pay commissions or fees like you would to a brokerage. However, you will probably have to wait for an official delivery date for your coins because ETFs get delivered on a regular basis around the world. Also, you have no say over how the gold will look on the day you buy it. You won’t have any control over the weight and the quality of the gold, so you’ll have to accept whatever the company wants to give you for your ETF shares.
An alternative to buying ETFs directly is to invest in ETFs through a brokerage. The difference between the two isn’t obvious at first glance. With an ETF you don’t have to worry about holding shares for several months or years to accumulate a large amount of money – you can do that with stocks and bonds. Plus, with ETFs you don’t pay commission fees or certificates of deposit, so you end up with some very nice deductions on the value of your shares. With a brokerage, though, you’ll probably end up paying more because you won’t be paying as much for the convenience.