Gold Mutual Funds Alternatives - ETFs & ETNs

There are many US and foreign gold ETFs and ETNs available for US investors. 

An alternative to gold mutual funds are gold ETFs (Exchange Traded Funds) and gold ETNs (Exchange Traded Notes--a type of security that combines the characteristics of both bonds and exchange traded funds. They have a maturity date and can be held until maturity but are also traded like ETFs during normal trading hours). Some of these ETFs are negative bets on the price of gold (inverse ETFs) and investors who think the price of gold will be going down can consider these as an investment option. Others offer a means to amplify returns, either positive or negative, typically by a factor of two or three (leveraged ETFs).

What is an ETF?
Like a mutual fund investment, an ETF is a packaged investment vehicle that invests in a basket of securities or other investments. However, unlike a mutual fund (or more correctly, an open-end mutual fund), an ETF will trade in a stock exchange throughout the trading day much like a stock instead of only at the close of the trading day.

Most ETFs today are more like index funds with the objective of tracking some market index or benchmark in performance and they cover pretty much the whole universe of the global stock and bond markets. This gives investors the ability to fine tune their market exposure like never before.  They can buy, sell, short and track every imaginable slice of the markets throughout the day--gold and precious metals, technology, utilities, health care, REITs, small cap value, mid cap growth, intermediate long-term treasury bonds, Treasury Inflation Protected Securities (TIPS), light sweet crude, soybeans, the Euro, the US Dollar, the stock markets of India, Australia, China, Germany...and the list goes on.

ETFs are not for everyone and to find out if this investment vehicle is right for your needs, here is a list of some of the most common ETF pros and cons:

• ETF Pros
  
• Wide diversification coverage via hundreds of market sectors as mentioned above.
• ETFs can have very low expense ratios compared to mutual funds, even index funds.
• Tax efficiency-ETF managers buy and sell their holdings far less than their mutual funds counterparts. This contributes not only to the lower expenses but to a lower tax bite, all else being equal. Also, you only pay capital gains taxes when you sell at a gain unlike a mutual fund where you may pay taxes at the end of every year even if you just held the shares. This is because the manager  may have racked up gains from trading and dividends received and passes this on to you.
• No minimum investment requirements unlike in mutual funds, so you can invest whatever you like, even one single share.
• Easy to buy and sell--all you need is a brokerage account and you can trade ETFs as easily as stocks.
• Leverage-You can option, short and hedge ETFs just like a stock, giving you outstanding flexibility and choice. Plus there are many "ultra" ETFs that are designed to give you 2x or 3x long and short positions.
  
• 
  ETF Cons
  
• Over-diversification--the very ease of diversifying a portfolio with ETFs can also lead you to have too many baskets for your eggs, so to speak, and thus potentially reduce your returns in some markets. Diversification is not always a good thing, specially if you diversify too aggressively.
• Over-trading--the ease of trading ETFs along with their low costs can lead some to over-trade these securities and this can be pretty dangerous, specially if you are dealing with the 2x or 3x ultra leveraged variety.  Also, it can quickly become very expensive if you are trading in and out of securities.
• Liquidity can be an issue with some ETFs that are thinly traded since the spread (the difference between the buying and selling price, or the bid and ask) can widen and add significantly to the cost of investing in them.
• Same negative issues as index funds--an index is often over-weighted in a very few stocks because of their market weighting, so an investment in index ETFs can cause you to effectively be lop sided in your weightings too.
• Dividends are not reinvested in additional shares of the ETF unlike in a mutual fund and you get paid the dividend in cash. If you want to reinvest this cash in additional funds, you will have to pay another commission.