by | Jul 18, 2023 | Precious Metals

Last Updated: December 7, 2023

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Every year, more investors turn to precious metals to protect and grow their wealth. Among the various investment options available, precious metals exchange-traded funds (ETFs) are a compelling choice thanks to their simple, convenient, and highly liquid approach to investing in gold and other precious metals. 

While initially sought after as a risk hedge and portfolio diversifier, these funds are now catching the eye of the investing public due to their potential for capital appreciation. 

Take, for example, Aberdeen Standard Physical Palladium Shares ETF (PALL), a precious metals ETF traded on the NYSE Arca that boasts a stunning 117.28% average annualized return—far exceeding that of the S&P 500.

Interested in this emerging asset class? Let’s take a look at the basics of precious metals ETF investing, how to invest in precious metals ETFs, gold mining ETFs, and other precious metals funds in order to manage risk and diversify your wealth in your portfolio. 

Why Invest in Precious Metals ETFs?

There are a host of compelling reasons why investors may want to add precious metals ETFs to their investment portfolio, including the following:

  • Rising Global Demand for Gold: Gold has long been regarded as a safe haven asset and a hedge against inflation and geopolitical uncertainties. Recently, global gold demand has witnessed a significant surge, reaching 4,355.7 tons in 2022, representing a 27% increase from the previous year. 
  • Diversification: ETFs provide exposure to a basket of precious metals, including gold, silver, platinum, and palladium. This diversification helps spread risk and reduces exposure to any single metal’s volatility.
  • Accessibility: ETFs are traded on major stock exchanges, making them easily accessible to individual investors. They offer a cost-effective alternative to physical ownership of precious metals, eliminating storage and security concerns.
  • Liquidity: ETFs are highly liquid, allowing investors to swiftly buy and sell shares throughout the trading day. 
  • Transparency: Precious metals ETFs disclose their holdings regularly, allowing investors to track the underlying assets and evaluate the fund’s performance.
  • Tax Efficiency: ETFs generally generate fewer taxable events compared to individual gold bullion transactions, allowing for optimal tax strategies.

Stellar Performance of Precious Metals ETFs

The performance of precious metals ETFs in recent years has been remarkable, reinforcing their potential as an investment vehicle. For example:

ETF Average Annualized Returns (2017-)
SPDR Gold Shares (GLD) 18.61%
iShares Silver Trust (SLV) 39.05%
Aberdeen Physical Palladium Shares (PALL)    117.28%

 

While some precious metals ETFs have certainly seen success in recent years, it’s important to note that others have not shared the same fate. 

Many precious metals ETFs closely track the spot price of the metal asset to which it is most exposed, creating a high degree of volatility. For instance, it is not uncommon for gold mining ETFs to drop by 5 percent or more within a span of a week due to bearish gold price signals, such as:

  • Increasing U.S. Treasury yields
  • Positive U.S. jobs reports
  • Increased U.S. Dollar Index (DXY)
  • Lower-than-expected U.S. inflation reports

Despite some funds’ exposure to volatile price fluctuations, most precious metals ETFs enjoy far greater price stability than conventional funds with holdings concentrated in technology, biomedicine, and healthcare. 

For example, the average one-year return of the 21 largest precious metals ETFs in the U.S. is 14.98 percent with a 0.47% expense ratio. Shared between these 21 funds—which include BlackRock Financial Management, World Gold Council, and VanEck—is about $112 billion in assets under management. 

Standard benchmark funds invested in multi-sector equities, such as the S&P 500 Index Fund, have a far lower average annualized return. Since 1993, the S&P 500 has averaged a return of about 7.48 percent

To be sure, other ETFs and index funds have outperformed even the best-performing gold ETFs. For example, the Technology Select Sector SPDR Fund (VLK) boasts a remarkable 20.71% 5-year return. However, funds such as these tend to have far more volatile track records, with the VLK, in particular, having a nearly 26 percent 1-year volatility score. 

Chart 1: SPDR Gold Shares (GLD) 2014 to 2023 Market Cap. (Source: Financial Times)

 Since the global financial crisis of the late 2000s, most ETFs that track the performance of the precious metals industry have consistently trended upward year over year. Top-performing ETFs such as GLD (shown above) demonstrate the capital appreciation potential of this asset class.

Downsides of Precious Metals ETF Investing

All investments involve opportunity costs and other risks, and precious metals ETFs are no exception. Below, we’ve listed some of the main tradeoffs to precious metals ETF investing.

  • Lack of physical possession: Investing in precious metals ETFs means you don’t physically own the underlying metal. While this can be convenient, it also means you don’t have direct control or possession of the actual asset.
  • Counterparty risk: Precious metals ETFs rely on the performance of the ETF issuer. There is a level of counterparty risk involved, as the value of the ETF is dependent on the financial health and stability of the issuer.
  • Management fees: Like other ETFs, precious metals ETFs charge management fees, which can erode your overall returns over time. It’s essential to consider the expense ratio of the ETF and assess whether the fees are justified (especially since precious metals ETFs usually carry higher expense ratios upwards of 0.4%).
  • Tracking error: Precious metals ETFs aim to replicate the performance of the underlying metal, but there can be tracking errors. These errors may arise due to factors like fees, imperfect replication methods, or market liquidity, which can result in deviations between the ETF’s performance and the actual metal’s price.
  • Tax implications: Selling or redeeming precious metals ETFs may have tax consequences, such as capital gains taxes. It’s crucial to consult with a tax professional to understand the tax implications specific to your jurisdiction and investment situation.

These drawbacks and tradeoffs should be carefully considered before making investment decisions in precious metals ETFs, and it’s advisable to conduct thorough research and seek professional advice to align your investment strategy with your financial goals and risk tolerance.

Getting Started in Precious Metals ETFs

Investors interested in getting involved in precious metals investing via ETFs have several options. I’ve listed the most commonly utilized options for investing in precious metals ETFs:

  • Online Brokerage Accounts: Investors can open an account with an online brokerage firm that offers a wide range of investment products, including precious metals ETFs. These platforms provide access to various ETFs, allowing investors to buy and sell shares conveniently.
  • Robo-Advisors: Robo-advisors are digital platforms that use algorithms to provide automated investment advice and management. Some robo-advisors offer portfolios that include precious metals ETFs as part of their asset allocation strategies. Investors can choose a robo-advisor that aligns with their investment goals and risk tolerance.
  • Traditional Brokerage Firms: Investors can also work with traditional brokerage firms that offer personalized investment services. These firms typically have financial advisors who can guide investors in selecting suitable precious metals ETFs based on their individual circumstances and objectives.
  • Retirement Accounts: Many retirement account providers, such as Individual Retirement Accounts (IRAs) and Self-Directed IRAs, allow investors to include precious metals ETFs within their investment options. This can provide tax advantages, such as tax-deferred or tax-free growth, depending on the type of retirement account.

It’s important to conduct thorough research, compare fees and expenses, and consider factors such as liquidity, performance, and issuer reputation when choosing the method and platform for investing in precious metals ETFs to avoid gold investment scams

At Sophisticated Investor, we recommend investing in precious metals ETFs via registered retirement accounts such as a 401k or individual retirement account (IRA). These account types provide a host of tax advantages that traditional investment accounts do not, allowing the ETFs held within the accounts to appreciate on a tax-deferred or tax-free basis. 

Precious Metals ETF Investing in an IRA/401(k)

However, not all retirement accounts are the same. When it comes to retirement accounts, there are two common types for investing in precious metals ETFs: Traditional IRA and Roth IRA.

Traditional IRAA tax-advantaged retirement account where contributions may be tax-deductible in the year they are made. The earnings in a Traditional IRA grow tax-deferred until withdrawal, at which point they are subject to income tax.

Roth IRAUnlike a Traditional IRA, contributions to a Roth IRA are made with after-tax money, meaning they are not tax-deductible. However, the earnings in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. For precious metals ETF investors, a Roth IRA can be beneficial as it offers the potential for tax-free growth on their investments.

Both Traditional and Roth IRAs can hold precious metals ETFs as part of their investment portfolio. The choice between the two types of IRAs depends on an individual’s specific circumstances, tax considerations, and future retirement goals. 

Here are some key differences between Traditional and Roth IRAs for precious metals ETF investors:

  • Tax Treatment: In a Traditional IRA, contributions may be tax deductible, but withdrawals are taxed as ordinary income. In a Roth IRA, contributions are not tax-deductible, but qualified withdrawals are tax-free.
  • Required Minimum Distributions (RMDs): Traditional IRAs require account holders to start taking RMDs once they reach age 72, which are subject to income tax. Roth IRAs do not have RMDs during the account holder’s lifetime, allowing investments to potentially continue growing tax-free.
  • Tax Considerations: Precious metals ETF investments within a Traditional IRA may provide immediate tax benefits through deductible contributions, potentially reducing an investor’s current taxable income. 

Remember to consult with a tax professional or financial advisor to assess your individual financial situation, tax goals, and retirement objectives when deciding between a Traditional IRA and a Roth IRA for investing in precious metals ETFs.

How to Invest in Precious Metals ETFs

If you have decided to invest in precious metals ETFs, we recommend inquiring with a reputable precious metals IRA company to kickstart the investment process. 

These companies work with accredited third-party IRA custodians to facilitate investing in diverse, alternative assets via tax-advantaged retirement accounts. Accounts can be funded via direct IRA-to-IRA rollovers from pre-existed accounts, 401(k) transfers, or funded from scratch. 

Here’s a list of some of America’s best precious metals IRA companies that can help facilitate the purchase of precious metals ETFs within a Roth or Traditional IRA:

We recommend contacting several precious metals IRA companies to compare rates and product selection before moving forward with a purchase. Any of those listed above can provide one-on-one support for precious metals ETF investing or investing in physical bullion products.

Precious Metals ETFs: The Best Option for Gold Investors?

Precious metals ETFs present American gold investors with an enticing opportunity to gain exposure to the ever-appealing asset class of precious metals. With rising global demand for gold, the advantages of diversification, accessibility, liquidity, and transparency, coupled with the stellar performance of precious metals ETFs in recent years, investors have a compelling case to consider adding these funds to their investment portfolios. 

By harnessing the power of precious metals ETFs, investors can potentially safeguard their wealth and tap into the long-term growth potential offered by these valuable assets.

Nonetheless, it’s not clear whether precious metals ETFs are the best choice for precious metals investors. For those who want greater asset security, owning physical precious metals may be a wiser choice. Savvy investors, therefore, may want a portion of their precious metals exposure to be in the form of physical gold or silver bullion.

Contact a top-ranked precious metals IRA company today to invest in precious metals ETFs or physical bullion products within a tax-advantaged retirement account. 

Liam Hunt

Liam Hunt, M.A., is a financial writer covering global markets, monetary policy, retirement savings, and millennial investing. His commentary and analysis have been featured in the New York Post, Reader's Digest, Fox Business, and Forbes.