Exchange traded funds (ETFs) are another type of investment fund for gold investors. They differ from mutual funds in that they generally invest their clients’ money in bullion, although ETFs investing in gold stocks can also be found. Another difference is that ETFs are not actively managed. They have a passive investment strategy. Exchange traded funds shares are traded like stocks, on the stock exchange.

Major advantages of ETFs include their liquidity, tax efficiency and relatively low costs. They very closely follow precious metal prices allowing investors to earn a return very similar to what they would earn on bullion coins or bars. What is more, one unit or one share of an exchange traded fund usually corresponds to less than one troy ounce of gold. If the price of an ounce of gold is $1700, then it may be quite hard for an individual investor to buy it. But if one share of an ETF corresponds to 0.1 troy ounces, it becomes affordable to a larger number of people. Exchange traded funds are very liquid financial instruments. They are quoted on stock exchanges, which means that they can be bought or sold any time during the trading session, just like shares. They are characterized by a low bid/ask spread, which makes them a good tool for speculation.

Gold investing with ETFs also involves some risks. Exchange traded funds usually hold large amounts of gold. These amounts, however, may differ depending on the fund and may be less than 100%. Generally speaking, the more gold backing a fund has, the less risky it is. Although a fund may have gold in its treasuries and safes, it may belong to someone else, not the fund, for instance because of the short sale. In addition, when we buy ETF shares we do not become gold owners and our shares usually cannot be exchanged for bars or coins.

Exchange traded funds are quite often criticized for their complicated structure lacking in transparency, making it hard to correctly assess risk and possible returns. They are frequently compared to derivatives. If the price of gold rises by 10%, the value of an ETF share doesn’t necessarily have to rise by 10% (although it usually does, at least approximately). This is because of their complicated structure and the fact that the price of an ETF share is influenced by a variety of factors. Another disadvantage is that in the future an ETF may cease to follow gold prices sufficiently. This may be caused by many factors, such as turbulence in financial markets, a crisis or a lack of sufficient backing in gold. Just like mutual funds, ETFs charge various kinds of commissions and fees, which slightly (fraction of a percent) deplete the return. Investing long-term capital in ETFs also involves the risk of losing invested money because of the fact that the firm managing it may become insolvent or go bankrupt.

The first gold ETF in the world, Gold Bullion Securities, was created in March 2003. Its shares are quoted on the Australian Stock Exchange in Sydney. At the time of its inception one share corresponded to 0.1 troy ounce of gold. As of now (March 2012) the biggest gold ETF in the world is SPDR Gold Shares (GLD), which is also the second biggest ETF in the world in terms of asset value.

A lot of ETFs can be found on the New York Stock Exchange (NYSE), London Stock Exchange (LSE) or Toronto Stock Exchange (TSX).