Gold exchange-traded funds give investors the same kind of exposure to gold that any other company stock or ETF would. Gold ETFs have benefits and drawbacks, just like every other investment. If you use them correctly, they may help you achieve your investing goals. Here are two advantages of owning a gold ETF in your portfolio.
1. It can help you hedge against inflation
Consumers goods become more costly during inflation, and the dollar’s buying power deteriorates. Inflation in the United States rose 7.9% in February 2022, driven largely by food and energy costs. Because gold is priced in dollars — that is, its underlying value is expressed in terms of dollars — it rises in price as inflation increases.
Many investors find themselves converting some of their cash assets into gold as inflation rises in order to safeguard the value of their portfolio. A chain reaction may ensue, raising the price of gold even further, as a result of this increased demand for gold. This is why, historically, analysts have considered gold to be a hedge against high inflation.
Unfortunately, this process of acquiring, transporting, and storing real gold is time-consuming and expensive. Gold ETFs let you capitalize on the value of gold without having to worry about the logistics of holding physical bullion.
2. It can help you avoid potentially higher taxes on capital gains by keeping it in a retirement account.
The IRS classifies commodities such as precious metals, antiques, artwork, currency, stamps, and other collectibles as “alternative assets.” They are taxed at a higher max 28% capital gains long-term rate. ETFs backed by valuable metals like silver and gold, unlike ETFs subject to your standard capital gains long-term tax rate, are also subjected to this greater rate.
If you earn $100,000 per year, your long-term capital gains rate would be 15%. So, for a $1,000 profit on a normal ETF, you would owe $150 in taxes. You’ll pay either your regular income tax rate or 28%, whichever is less if it’s a gold ETF. Fortunately, gold ETFs put into a Roth IRA can help to offset these extra capital gains taxes.
Because you put after-tax money into your Roth IRA, you will not have to pay taxes when you take withdrawals during retirement. Let’s assume you invested $100,000 in both accounts using dollar-cost averaging and earned $100,000 worth of profit.
With a Roth IRA, you’ll reap all $100,000 after you sell the gold ETF and withdraw the cash. However, you’ll be responsible for 28 percent on $100,000 with the brokerage account, resulting in a tax bill of $28,000.
Many benefits in one
Diversification is one of the most important features of a decent financial portfolio; you do not want all of your retirement money tied up in a few assets. Adding a gold ETF to your retirement fund helps you protect against inflation while also diversifying your holdings. Gold ETFs can assist put your portfolio on a long-term path to success.