Despite their differences, both gold ETFs and gold futures offer investors the opportunity to diversify their positions in the metals asset class. The margin works in a similar way but is different on the futures market. When trading futures, a trader makes a deposit in good faith, known as an initial margin requirement. The initial margin requirement is also considered a performance guarantee, which ensures that each party (buyer and seller) can meet their obligations under
the futures contract.
Initial margin requirements vary depending on product and market volatility and are usually a small percentage of the contract’s nominal value. This type of leverage involves a high level of risk and is not suitable for all investors. Greater leverage can result in much larger losses quickly and if the price movements of the underlying futures contract are low. By investing in gold ETFs, investors can invest their money in the gold market without having to invest in the physical commodity
.
Since gold itself does not generate any income and there are still expenses that need to be covered, ETF management is allowed to sell gold to cover these expenses. Although gold futures contracts allow investors to buy and sell gold at their own discretion through online trading platforms and full-service brokers that offer futures trading, trading gold futures carries a certain level of risk. The difference between gold ETFs and gold futures is that, on the one hand, gold ETFs offer investors a cost-effective, diversified alternative to investing in gold-backed assets rather than in physical commodities. Gold futures, on the other hand, are contracts between buyers and sellers that are traded on centralized exchanges, where the buyer agrees to buy a quantity of the metal at a fixed price at a fixed future date. That’s because gold ETF managers don’t invest in gold because of its numismatic value, nor are they looking for collector
coins.
While gold ETFs offer a flexible way to gain exposure to this asset class, buying gold ETFs comes with risks. According to the World Gold Council, it takes a long time for gold explorers to put new mines into production and find new gold deposits. Gold ETFs can expose investors to liquidity-related risks, i.e. risks associated with how easy gold ETFs are to be bought or sold on the market and converted into cash. The SPDR Gold Trust ETF was touted as a cost-effective alternative to owning physical gold or buying
gold futures.
