Investors usually obsess over returns, but little do they know that a single significant market downturn can wipe out all the returns they have accumulated over the years.
At the pinnacle of the COVID-19 pandemic, the S&P 500 fell by 23.9% in a month. Interestingly, the average yearly return of the S&P 500 over the past 10 years is only 12.9%.
Knowing how to invest in gold ETFs is one way you can protect yourself from such market downturns and ensure the long-term growth of your portfolio. In what follows, we consider why gold is important to your portfolio and why gold ETFs are the best way to invest in gold.
The case for investing in gold
In six of the eight recessions that the US economy has experienced between 1973 and 2020, gold outperformed the S&P 500 index.
During the global recession (2008-2009) when stocks were crumbling, gold’s price increased by more than 50%. Also, while stocks lost 22% of their value in 2022, gold’s price still went up by 0.4%.
In essence, when stocks are fighting for their lives during economic crises, gold tends to hold its own, even turning out profitable for investors.
Similarly, in deflationary periods, when prices are falling, gold’s price tends to increase. This was especially evident during the deflation that accompanied the Great Depression.
Finally, gold proved to be a valuable inflation hedge during the Great Inflation period of the 1970s.
Though it has not repeated this performance since then (especially during the inflation that followed the COVID-19 pandemic), experts believe that gold is still a good way to hedge against inflation over a long time horizon.
Given the outsized impacts that economic recessions, depressions, and market downturns can have on a portfolio, gold can be a haven that protects your portfolio in those difficult moments.
The case for investing in gold ETFs
But buying physical gold (gold bullion) is too much of a hassle. You have to think about transporting and securing it. This is in addition to paying a premium (making charges) for it.
Alternatively, you can buy the stocks of companies that are involved in the mining and distribution of gold. The prices of these stocks will be positively correlated to the price of gold.
However, buying individual stocks will not provide you with the diversification you need to reduce your portfolio risk. Achieving diversification with individual gold stocks will require that you have a large capital outlay. Even if you do have such an outlay, the transaction costs of purchasing one stock after another can add up.
Gold mutual funds can solve the diversification problem. Mutual funds will bring together capital from various investors, which provides it with the outlay required to diversify into multiple gold stocks and even gold bullion.
However, there are certain challenges with gold mutual funds:
- Minimum investment: Mutual funds will require that you have a minimum amount of capital before you can participate.
- Illiquidity: You can’t trade your shares in the mutual fund during trading hours. You have to wait for the close of trading day.
- Transparency: Mutual funds are usually hesitant to publish their holdings as they consider it a trade secret. You may not know what your fund invests in.
- High cost: Since they are actively managed by professionals, mutual funds charge high fees.
Gold ETFs – which also invest in various gold stocks and gold bullion – can solve these problems:
- No minimum investment: You don’t need to have a certain amount of capital to start. Many trading platforms will even allow you to purchase a fraction of an ETF. If an ETF trades at $150 per share, you can buy just 0.5 of it for $75.
- Liquidity: You can trade ETFs during normal trading hours which makes them more liquid.
- Transparency: ETFs are required by law to declare their holdings. You will always know what the fund invests in.
- Low cost: Since they are passively managed, gold ETFs are cost-effective, resulting in a lower expense ratio for investors.
Purchasing gold ETFs in the UAE
If you want the portfolio protection that gold provides, purchasing gold ETFs is a smart way to gain exposure to the gold market.
Sarwa provides UAE residents with a simple way to purchase gold ETFs right from the UAE. Through its Sarwa Trade app, you can invest in gold in the UAE by buying cost-effective and transparent gold ETFs.
Sarwa Trade uses 256-bit encryption to protect your data and money and its low commissions and fees ensure that you can keep most of your returns. Transfers from your local bank account to your brokerage account are free and deposits are completed immediately so you can start trading right away.
