So you think the world’s investment outlook is looking volatile and you want to get into gold?
Well, you can by shares in a gold miner, or you can actually go and try and locate some physical bullion and store it in a vault.
There is another way, and it is becomingly increasingly popular, and that is to choose an Exchange Traded Fund (ETF) which tracks the price of gold.
The market for ETFs is booming in Australia as more and investors understand the advantages of this type of security: it is traded on the stock market so it has liquidity, and while it is an investment it tracks anything from a commodity price to the performance of the ASX200.
You might not be a big global investor with a New York broker waiting for your call, but at the same time an ETF traded on the ASX – purchased on any online trading platform – can give you exposure to some of the world’s biggest markets.
Around 180,000 Australian investors have put their money into ETFs, and the value of ETFs on the ASX is more than $17 billion. Around 7000 financial advisers have ETFs in their kitbag to offer their clients.
Some investors like ETFs because they are index investors – tracking an index over time.
But you don’t have to be an index investor to be into ETFs. Like the example of gold, you can make the same market calls as any large investor and use ETFs to balance your portfolio.
The chemical element Palladium, for example, is in demand to supply companies making catalytic converters in cars.
Short of actually purchasing palladium yourself and selling it to the car maker, there is a Palladium ETF on the market which tracks the price.
There are some caveats to consider. ETFs can go up and down and fluctuate like the price of any share.
Also, fees and taxes mean that the ETF may not be totally exact in tracking the investment or index they have chosen.
ETFs are not without their issues. As the ETF universe has expanded to a huge US$3.3 trillion worldwide, US regulators are looking at whether the rapid growth in ETFs – which now account for 30 percent of the value of all US shares traded – is creating market volatility.
In August 2015, US regulators temporarily suspended 1000 securities from trading when some ETFs sharply diverged from their net asset values, highlighting the inter-relationship between the ETFs and the underlying assets.
But in an investment world full of acronyms and abbreviations, ETFs are among the simplest, most accessible, and easy to understand.
Remember CDOs – Collateralised Debt Obligations? These were highly complex derivatives which barely anyone finally understood, and which prompted the collapse of Lehman’s investment bank and brought on the Global Financial Crisis.
An ETF is not a CDO, by any stretch of the imagination.
After careful consideration and research, and perhaps some sound advice, it could have a legitimate place in an investment portfolio.
For more information on ETFs and Managed Funds click here.