Gold IRA vs. Gold ETF: Which One Works Best for You?

Inflation has been a growing problem in the global economy, and the United States isn't exempted from its effects. However, gold is viewed as one of the good options when you're looking to protect your portfolio from the impact of inflation and reduce volatility over the long term.

While this may be the case, it's also important to remember that there is no one-asset solution during high economic inflation. Amy Arnott, a portfolio strategist for Morningstar, who analyzed the performance of different asset classes during high inflationary periods, said, 'gold isn't a perfect hedge.' This idea means that while gold is an excellent asset to turn into during economic struggles, there's no guarantee that this coveted precious metal will generate above-average yields.

From a retirement perspective, precious metals such as gold stay true to their value and reputation. But on a shorter timeline, you may look into other assets for better asset performance. Rather than putting your eggs in one similar basket, consider allocating a portion of your investment to four other asset classes: Treasury securities, real estate investment trusts (REITs), other commodities, and stocks. Michael McClary, Chief Investment Officer at Valmark Financial Group, remarked that these assets would give a better hedge against inflation.

The value of gold will never reach a zero mark, even in times of economic trouble. This notion held even during the 2008 crisis—a company collapsed and went bankrupt. Like all other assets and commodities during the crisis, gold struggled. However, this precious metal proved its resilience and rallied three years later.

Another reason gold remained a valued commodity is its attainment. The central bank can print out currencies and increase its supplies—ultimately reducing their value. The acquisition of these precious metals isn't as straightforward. Mining gold requires tedious labor and hefty costs.

For these reasons, gold's value remained competitive in the market. It can be considered an alternative asset to maximize the diversification and portfolio value of your IRA.

Gold has a low correlation with stocks and bonds. Between 2012 and 2020, gold has a correlation value of 0.02 and 0.28 for both S&P 500 and U.S. Bonds, respectively. A figure closer to 0 means no relationship, while a value of 1 means they have similar behavior.

Because of this notion, owning gold in your retirement portfolio can help minimize risks brought about by financial crises and inflation.

There are different types of gold IRA accounts, each of which has unique tax benefits.

A gold IRA gives you plenty of headroom for control and direction compared to a traditional IRA. For one, you can select between the different precious metals you want to purchase. The IRS allows bullion, coins, and proofs that meet their established specifications. Some of them are the American Eagle Gold coins, Australian Koala Silver coins, Isle of Man Noble Platinum coins, Canadian Palladium Maple Leaf coins, and other coins and bars.

Besides having the liberty of choosing what precious metal to add to your retirement portfolio, you can also use your gold IRA to leverage your position in the market. You could either buy when the gold price is low and sell it high or avoid a potential portfolio loss by selling your gold assets before its price dip.

Inflation has been a growing problem in the global economy, and the United States isn't exempted from its effects. However, gold is viewed as one of the good options when you're looking to protect your portfolio from the impact of inflation and reduce volatility over the long term.

While this may be the case, it's also important to remember that there is no one-asset solution during high economic inflation. Amy Arnott, a portfolio strategist for Morningstar, who analyzed the performance of different asset classes during high inflationary periods, said, 'gold isn't a perfect hedge.' This idea means that while gold is an excellent asset to turn into during economic struggles, there's no guarantee that this coveted precious metal will generate above-average yields.

From a retirement perspective, precious metals such as gold stay true to their value and reputation. But on a shorter timeline, you may look into other assets for better asset performance. Rather than putting your eggs in one similar basket, consider allocating a portion of your investment to four other asset classes: Treasury securities, real estate investment trusts (REITs), other commodities, and stocks. Michael McClary, Chief Investment Officer at Valmark Financial Group, remarked that these assets would give a better hedge against inflation.

The value of gold will never reach a zero mark, even in times of economic trouble. This notion held even during the 2008 crisis—a company collapsed and went bankrupt. Like all other assets and commodities during the crisis, gold struggled. However, this precious metal proved its resilience and rallied three years later.

Another reason gold remained a valued commodity is its attainment. The central bank can print out currencies and increase its supplies—ultimately reducing their value. The acquisition of these precious metals isn't as straightforward. Mining gold requires tedious labor and hefty costs.

For these reasons, gold's value remained competitive in the market. It can be considered an alternative asset to maximize the diversification and portfolio value of your IRA.

Gold has a low correlation with stocks and bonds. Between 2012 and 2020, gold has a correlation value of 0.02 and 0.28 for both S&P 500 and U.S. Bonds, respectively. A figure closer to 0 means no relationship, while a value of 1 means they have similar behavior.

Because of this notion, owning gold in your retirement portfolio can help minimize risks brought about by financial crises and inflation.

There are different types of gold IRA accounts, each of which has unique tax benefits.

Gold ETFs behave similarly to any other stock in the market. This property is indicative that they share the same characteristics, such as liquidity and flexibility. Comparable to stock assets, you can transact on ETFs with minimal overheads and administrative requirements.

On the other hand, investing in physical gold requires more hands-on asset management. It takes time, skill, and effort to purchase, trade, sell, and transport these valuable metals.

As mentioned above, gold ETFs require minimal overheads. You won't have to pay a hefty price for handling, securing, storing, and transporting these precious metals. Unlike investing in gold ETFs, purchasing this physical precious metal requires you to factor in these costs. This point highlights that investing in gold ETFs is more economical than owning physical gold, like in a gold IRA.

Although a rare occurrence, physical gold can be stolen or lost. In contrast, these events are negated when you opt for an ETF route. Case in point, gold ETFs share a similar investment yield to real gold. Therefore, you'll get identical results with a reduced risk of scams and fraud.

Gold ETFs are part of mutual funds that invest in 99.5% pure gold. They behave like stocks and bonds, with a minimal deviation in prices and returns. When you transact with these assets, you won't have to worry about the quality of physical gold.

In contrast, gold is a physical metal commodity. When you invest in something valuable and tangible, you ensure that its quality meets the highest standard. A disparity exists in the per-ounce prices of different institutions that deal with these precious metals. Several factors of these disparities include geographical locations and trading fees.

Another advantage of investing in gold ETFs is their capacity to be bought in smaller quantities and denominations. You can buy up to one unit, equating to one gram of gold. This property makes gold ETFs an ideal starting point for investors seeking an economical option to diversify their portfolio exposure without involving physical gold.

Unredeemable for Physical Gold
Despite the name and similarity in performance, gold ETFs aren't redeemable for physical gold. When you buy ETFs, you purchase gold-backed contracts rather than the physical commodity. They're convertible for cash, but it defeats the purpose of buying gold ETFs and portfolio diversification.

Investing in gold ETFs is comparable to other investment instruments available in the market. You'll incur add-on expenses and commission fees every time you buy and sell shares.

The expense ratio, a figure you'll encounter when you engage with ETFs, reflects how much an ETF pays for expenses such as administration, portfolio management, and distribution. It's usually stated as a percentage of the fund's average net assets. The lower the expense ratio, the more economical it is for investors to transact in a fund.

There are also a handful of gold ETF brokers that offer commission-free trading. Both intraday traders and long-term investors should consider these factors when incorporating this asset class into their gold investment portfolio.

Although a rare occurrence, physical gold can be stolen or lost. In contrast, these events are negated when you opt for an ETF route. Case in point, gold ETFs share a similar investment yield to real gold. Therefore, you'll get identical results with a reduced risk of scams and fraud.

Plenty of gold ETF options have emerged since introducing this product into the U.S. market. Inexperienced investors may find it hard to choose which precious metals alternative will serve them best.

Here's the list of some of the top gold ETFs in the market:

iShares Gold Trust Micro ETF (IAUM)

• 5-year return: 54.60%
• Expense Ratio: 0.09%

iShares Gold Trust Micro ETF (IAUM)

• Expense Ratio: 0.17%

Aberdeen Standard Physical Gold Shares ETF (SGOL)

• 5-year return: 54.8%
• Expense Ratio: 0.17%

Another advantage of investing in gold ETFs is their capacity to be bought in smaller quantities and denominations. You can buy up to one unit, equating to one gram of gold. This property makes gold ETFs an ideal starting point for investors seeking an economical option to diversify their portfolio exposure without involving physical gold.