Updated 6/24/2024
Over the past few years, the US has experienced record-breaking inflation. This has affected people in every way financially from home loans to rising grocery prices.
One potential way to combat this is by investing in precious metals, such as gold. So, what would be the best Gold ETF to invest in? Let’s take a look at these top options!
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Gold vs. Stocks Long Term
A common topic in the financial community is coping with inflation. If not properly adjusted for, massive inflation, as we have seen since 2020, can seriously reduce wealth.
This conversation often leads to using precious metals, specifically gold, to combat inflation. That’s because precious metals are oftenn’t affected as much by inflation as companies and, therefore, their stocks.
While I do get the logic, part of me also feels like this is teetering on the edge of timing the market, right? And as we all know, time in the market beats timing the market. So, let’s take a look to see what gold prices have done over history vs. the S&P 500:
I decided to go back in time and look at the performance over the last 50 years and I’ll be honest, the results are extremely surprising, bet before we get into it, note that the S&P 500 returns do not include dividends paid, which are right around 2% or so.
Let’s take a look!
WOW! Gold absolutely kicks the butt of the S&P 500! Honestly, I never would’ve guessed that.
But wait…these numbers look a little bit fishy. The Max shows that Gold had a year where the return was 133%! Also, the median is significantly in favor of the S&P 500 but the mean is negative, showing that there are some major outliers at some point.
It turns out that this is accurate and that it occurred in 1980. While that’s great and all, that was 40 years ago, so is that something that we can really bank on in the future?
This next chart shows the same information but from 1990 instead of 1970, therefore showing the last 30 years:
You can see that the mean returns tick up about a percent for the S&P and drop by over 4% in gold, swinging the mean performance by about 5.5% vs. the 1970 chart and increasing the median as well.
Now things are starting to look more how I expected them to look!
But what about the last 10 years? Gold has been on a massive runup, right?
The S&P 500 still has outperformed by about 3% (again, remember no dividends are included) and the median is about 2%, meaning that there are some more outliers in here as well. At one point in 2020, Gold was up over 35%!!
But, it finished the year up 16.7%, a 2% outperformance of the S&P 500. In 2021, the S&P 500 is up 22% while gold is down 1%, so…
To me, your money is likely better in stocks, but gold can be great in certain portfolios depending on the use!
So, if you wanted to add some as an inflation hedge and had some good logic behind it, I wouldn’t be totally opposed as it doesn’t seem as slow as a bond or CD might be. You still definitely have some risk and can get some solid returns as well!
Tax Implications of Investing in Gold
Another important point is that holding gold has extremely different tax implications. I was unaware of this (as I have never personally owned gold), but it can drastically change your returns.
When investing in a normal stock, you’re taxed at your normal income rate for anything held under 1 year and then at a long-term capital gains rate for anything held over a year, which typically works out to be around 15%.
When holding gold, you’re taxed at your income rate for anything under 1 year. Anything over 1 year is still taxed at your income rate, but it’s capped at 28%.
So, if you’re in the 22% tax bracket in 2021 and make under $85,525 as a single or $171,050 as a couple and sell gold that you’ve owned for over one year, you’re still taxed at 22% instead of 15%.
That means if you made $1000, you now only have $780 instead of $850 as you would otherwise.
So, in other words, two things:
- 1 – you absolutely need to account for this when you’re doing the math on the potential ROI of your investment
- 2 – try to only hold gold in a tax-sheltered account like an IRA or 401k
The Best Gold ETFs
But the question is – where do you invest your money in gold?
Well, that’s where we come in! Let’s take a look at my Top 5 Gold ETFs (in no particular order):
GLD
Chances are, this is the most common ETF if you have heard of one before. GLD is an ETF where you are directly investing in gold bars that are held in London vaults. Because of this, the ETF price largely tracks the spot price of gold, which is likely your goal if you’re looking for a hedge against inflation.
GLD’s expense ratio is somewhat average at .40%. It’s common to see ETFs with expense ratios well under that, but that seems like a fairly common ratio.
It is by far the largest gold ETF, with just over $62 billion in assets under management, while the second-highest ETF has just over $31 billion. There’s not a ton to say about this ETF, as your goal is simply to mimic what the share price is doing, but I think it’s worth noting the historical performance of GLD, which I have taken from ETF.com.
Honestly, those returns have been pretty good in the last few years (as my data showed), but as soon as you get to the 10-year mark, you see those returns drop off significantly. To me, that means that you’re trying to time this market even more than I might’ve initially anticipated!
I personally love going to ETF.com because you can find a ton of great data and charts, such as the chart below showing the price history, but you’re best to just check it out yourself.
ETF.com will tell you the tax liability that you might face as you can see below with GLD:
This picture shows that the long-term (LT) capital gains are maxed out at 39.60%, and the short-term (ST) capital gains are maxed out at 28%.
This is super important to know, so please make sure you’re aware when investing in GLD!
GDX
Chances are, this is the second most common ETF you have heard of. GDX is an ETF that is made up of the top gold miners in the U.S.
The returns…oh the returns…
I mean, those are some pretty insane returns in the YTD, 1-year, 3-year, and even 5-year look, right? But that 10-year return makes me sick to my stomach.
Again, and I promise I am saying it for the last time, investing in gold seems to involve making a call on the market about what will happen to the price of gold.
While the excitement of the 5-year returns looks enticing, the disappointment of the 10-year returns is equally as bad…and honestly, might even be harder to handle than the benefit of the 5-year!
The expense ratio of GDX is .52%, so we’re starting to get slightly higher than I want. Now, if I thought this ETF was dynamite, then I wouldn’t really sweat this expense ratio, but I try to keep it at .4% or less if possible.
The dividend yield is .43%, so it does not even outweigh the expense ratio, so you could basically consider that a wash for all intents and purposes.
Now, off to one of my favorite parts of any ETF – the Top 10 holdings!
Honestly, I was expecting to see some pretty heavy weightings, but holy crap. I know that Newmont and Barrick are the big boys in this industry, but being just under 25% combined is really heavy. I mean, honestly, even Kirkland and above is a high percentage, sitting well North of 4%. But the industry is concentrated, and if those companies are really the strong performers, then you should welcome the heavy weightings.
IAU
IAU is very similar to GLD, but the Fund Owner is iShares rather than SPDR (GLD). This also results in it having a lower expense ratio at .25%, which is down to a level where I am very excited.
I do want to note that at the end of the day, expense ratios are likely so small that they won’t have a massive impact on your returns. The point where you should really care is when you’re looking to put money into the ETF in the first place.
For instance, if you think that IAU and GLD are identical, choose the one with the lower expense ratio. I’m not advocating for you to sell all of your GLD to go to IAU, but rather just putting a spotlight on it for something for you to look at in the future.
When we look at the returns of IAU, they’re essentially identical to GLD but slightly better, likely due to the expense ratio benefit:
As with GLD, you are investing in actual gold bars in this ETF, so you’ll be subject to that higher tax rate that I mentioned above—just another thing to ponder. All things considered, I would prefer IAU over GLD.
GDXJ
The next ETF is GDXJ, which is the Junior Gold Miners ETF. It is similar to GDX but has companies with much smaller market caps than those in GDX.
One sentence that stood out to me in the overview is, “The fund’s average P/E has often gone into negative territory, a tribute to the fact that many of the firms in the portfolio currently generate no revenue, let alone earnings.”
I mean…ugh lol. This is terrifying. No revenue…WHAT?
I’ve never even heard of something like that in an ETF, but hey, to each their own. I’ll keep going through my analysis, but I can promise you that I’ll never invest in a company that doesn’t have revenue.
I can sometimes convince myself of the promise and vision of a company that’s pre-income, but pre-revenue is a huge no-go for me.
The returns of GDXJ have been pretty strong, similar to GDX, for the last 5 years, but then we fall off the wagon again:
The expense ratio is .53% so right in line with GDX, so that’s not a deal breaker on my end.
I do love that the Top 10 Holdings are not as top-heavy and more evenly distributed, so that makes me feel good. I mean, the goal of an ETF is to diversify your risk, so investing in an ETF like GDX where two companies make up 25% of that ETF doesn’t exactly do that in my eyes.
The dividend yield is lower than GDX at .26% but that’s so low that it’s truly negligible.
All things considered, if I really wanted some sort of exposure to gold miners, I am going GDX 100 times out of 10. Yes, I know I said 10. I would never invest in anything pre-revenue. Ever.
GLDM
The final ETF that I am reviewing today is GLDM. Like GLD and IAU, GLDM tracks the price of gold by investing in actual bars of gold, meaning, that’s right, you guessed it, the higher tax rate.
The main difference is that GLDM is a much newer ETF, and the expense ratio is only .18%.
I won’t even go into the rest of the details, but I would gladly choose this ETF with the lower expense ratio than both IAU and GLD if it tracks the same thing—which it does!
Summary
So, I think the top two ETFs are GLDM and GDX. Personally, I would really only consider an investment in gold if I was trying to do some sort of inflation hedge, as I mentioned. If that were the case, I think that GLDM is the way to go because it has a direct relationship to the price of gold.
In the case of gold, I would be a huge fan of ETF investing, but are ETFs the way to go for all investments? As with anything, it always depends, but if you’re looking for some stable dividends then VOO might be the way to go!
It’s so nice it might even make you go, “VOOOOOOOOOOO!”
Ok. I’ll stop.
