Gold exchange-traded funds (ETFs) allow investors to gain exposure to gold (and its performance) in the same way as they would any other ETF or company stock. Like any investment, there are pros and cons, but if used well, gold ETFs can play a role in your portfolio. Here are two reasons why a gold ETF can be good for your portfolio.
1. It can help hedge against inflation
In times of inflation, consumer goods become more expensive and the purchasing power of the dollar declines. In February 2022 alone, inflation in the United States increased by 7.9%, mainly due to energy and food prices. Since gold is denominated in dollars, which means that its underlying value is expressed in dollars, its price generally increases as inflation rises.
When inflation occurs, many investors tend to convert some of their cash into gold to help protect the value of their portfolio. This increased demand for gold can trigger a chain reaction that raises the price of gold even further. This is why gold has always been considered an asset that can help offset periods of high inflation.
Unfortunately, the process of buying, transporting and storing physical gold can be inconvenient and expensive. Gold ETFs give you exposure to gold and its benefits without worrying about the logistics of physical gold.
2. Keeping it in a retirement account can help you avoid potentially higher capital gains taxes
Commodities – like precious metals, works of art, coins, stamps, antiques, etc. Unlike ETFs which are subject to your standard long-term capital gains rate, ETFs backed by precious metals like gold and silver also face this higher rate.
If you earn $100,000 a year, your long-term capital gains rate would be 15%. So if you bought and sold a regular ETF for a profit of $1,000, you would have to pay $150 in taxes. If it were a gold ETF, you would pay either your ordinary tax rate or 28%, whichever is lower. This could increase your tax bill by up to $130. Fortunately, you can offset these capital gains tax increases by buying gold ETFs in a Roth IRA.
Because you’re contributing after-tax money to a Roth IRA, you won’t have to pay tax every time you make retirement withdrawals. To see how much money you could save by buying a gold ETF in a Roth IRA compared to a brokerage account, let’s say you use the average dollar purchase and accumulate $100,000 in profit in both accounts. .
With a Roth IRA, as long as you are 59½, you will receive all $100,000 after selling the gold ETF and withdrawing the cash. However, with the brokerage account, you would owe 28% on the $100,000, which would create a tax bill of $28,000.
Multiple benefits in one
One of the key aspects of a good financial portfolio is diversification; you don’t want too much of your retirement savings tied to a few assets. Adding a gold ETF to your retirement portfolio is a great way to kill two birds with one stone by fighting inflation and diversifying your portfolio. Gold ETFs can help position your portfolio to thrive over the long term.