Gold ETF v. Gold Mutual Funds
The term “gold fund” is a somewhat generic term, and I tend to think of it as an umbrella category that includes a number of different investment vehicles, including instruments designed to do nothing more than track the price of gold bullion itself. The category could also be said to include gold-oriented mutual funds, which invest in gold mining companies. Yet, the term “gold fund” could also include a basket of mining stocks similar to a mutual fund, in the form of a gold ETF (exchange traded fund) that behaves more like an individual stock. Some people have certain aversions to mutual funds, and so I want to explore the use of a gold ETF as a mutual fund alternative.
Gold ETF Benefits
A gold ETF has a number of benefits over a mutual fund. First, since it trades like a stock, you can buy and sell throughout the trading session, rather than having to wait until the end. Second, real-time quotes are available and you can use limit orders, which I generally recommend. Finally, you can purchase call and put options on the ETF. Of the gold funds focused on producing mining companies, I like the Market Vectors Gold Miners ETF (GDX). This is a great choice for all of the flexibility noted above and it will give you the advantages over the mutual funds. The answer for those sold on an ETF, yet interested in smaller, exploration and development companies, would be the Market Vectors Junior Gold Miners ETF (GDXJ).
Gold ETF Detriments
Despite those benefits, I’ll share why I’m still not persuaded to participate in a gold ETF, like GDX, other than by opportunistic short-term exploitations of market swings. Unlike gold mutual funds, which are actively traded, the GDX is pegged to the New York Stock Exchange Arca Gold Miners Index. This Index is a constant group of precious metal producers throughout the world. That’s great, and increasing spot metal profits will make these companies wildly profitable as a whole.
However, with GDX you are stuck with the companies in the Index, like it or not. For the most part, this will not be an issue. But things do happen, even to major producers, which make given companies more or less attractive. A reasonably well informed investor can create his own basket of stocks to outperform GDX. Having said that, I haven’t tossed GDX to the curb completely. While I would never buy and hold GDX, since I can do better on my own, I am not opposed to using call options to extract unusually large and fast gains when there’s a leg up. As an example, on August 23, 2010 I bought a December 2010 $50 call option on GDX that I turned around and sold 6 weeks later (on October 6, 2010) for more than 100% return. I don’t want to be married to her, but I don’t mind dating occasionally!
Gold ETF Alternatives
To wrap up, if you wanted to dabble in the miners without the limitations of the ETF, you could look to a great mutual fund known as U.S. Global Investors Gold and Precious Metals Fund (USERX). And, perhaps even moreso with the riskier juniors, active management is probably a better idea. In this case, the door probably swings back towards a mutual fund such as USERX sister fund UNWPX, especially with the expert management of Frank Holmes.
At the end of the day, you’ll be choosing between the benefits of active management of the mutual funds and the competing interest of stock-like trading flexibility in the ETFs. For me, however, I’ll pass on the tension and choose not to choose. There’s simply no replacement for the gains I’ve personally obtained managing my own portfolio of resource stocks. I enjoy a lower cost of ownership and the freedom to invest for higher returns through making my own investment decisions rather than hopping on board someone else’s train.
If interested, I’ve written a companion article on Silver ETF Investing you might like to read.
