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Gold exchange-traded funds are exchange-traded products, meant to track the price of gold. They are traded on all major international stock exchanges, such as Zurich, London, New York and Mumbai.
Gold exchange-traded funds (ETF) hold assets like stocks and bonds close to their net value during a trading day. Usually they track an index. ETFs are very popular because they are cheap and tax-effective. They also share some of the properties of stocks. Exchange-traded funds are considered a hybrid, which combines the features of individual stocks and mutual funds. ETFs are similar to individual stocks because they are trading on the stock exchanges. This makes it easier to buy and sell. They are also similar to mutual funds meaning that they have a portfolio of assets. The main idea behind gold exchange-traded funds is to offer instant portfolio diversification.
Not everyone can buy and/or sell shares of ETFs. The people who can do this are known as authorized participants. They are usually major investors representing large establishments. They typically buy in bulk, as in thousands of shares at once. They create a secondary market for them, on which individuals conduct trade via brokers.
ETFs are like mutual funds in that they can be traded for the net value at the end of the day and like closed-end funds in that they can be traded at any time during the day for prices different from the net value. Bulk units of ETFs can be bought and redeemed, whereby the potential deviation between the market price and the net value of the shares is limited. ETFs have transparent portfolios, meaning that investors always know which assets to set if they want to purchase in bulk. In conditions of high demand, the price of ETF shares rises above the net value and more shares are bought. This increases market capitalization and lowers the market price per share, thus eliminating the premium over the net value. When demand is low, the process is quite similar. The shares are exchanged at a discount from the net value.
There are many advantages of gold exchange-traded funds. They facilitate easy diversification of investment portfolios and come with low expenses, tax efficiency, and more. They are cheaper than most investment products because most of them do not require hands-on management and are protected from the costs of having to trade bonds, thus accommodating shareholders’ purchases and redemptions. They traditionally have lower marketing, accounting, and distribution costs. They offer great flexibility in terms of buying and selling alike. They can be bought and sold at the current market price throughout the trading day. They are publicly traded, which is why shares of Gold exchange-traded funds can be sold short. Investors are able to specify the price points, at which they want to trade. Additionally, ETFs are tax efficient because they do not generate high capital gains.
Finally, it may be true that some gold exchange-traded funds hold some paper claims, but they hold a good amount of gold as well. Thus, ETFs will trade like gold in the short-term.
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