Throughout history, gold has been one of the most trusted safe-haven assets. When economic uncertainty rises or volatility starts to increase, investors naturally flock to gold as a way to preserve wealth. However, because buying physical gold can be costly, both in terms of premiums and storage costs, Canadian ETFs that own gold or gold stocks are some of the best ways to gain exposure to the precious metal.
It’s important to understand, however, that gold stocks aren’t the same as gold itself. Mining companies tend to be much more volatile, since their profits can swing sharply with even small changes in the price of gold.
For example, if gold trades at $3,000 an ounce and a miner’s cost is $2,500, its profit margin is $500. A modest $300 increase in the gold price (10%) would boost profits to $800, a whopping 60% jump. Conversely, if gold falls by just 5% (from $3000 to $2850), that company’s profits would shrink by 30%.
This leverage is why Canadian gold mining stocks often move more dramatically than the metal itself, and why ETFs, which offer considerable diversification, are so appealing to investors.
Some ETFs focus on large, established producers with diversified operations, offering more stability. Others concentrate on smaller, riskier junior miners that can deliver massive gains or significant losses. The good news is that ETFs make it easier to choose the level of risk and exposure that suits your portfolio, without the hassle of picking individual mining stocks.
So, with that in mind, here are two Canadian gold ETFs that offer simple, diversified ways to gain exposure to the precious metal.
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One of the best ETFs to buy for exposure to mining stocks
There’s no question that one of the best and most popular ways for Canadian investors to gain exposure to gold stocks is through the iShares S&P/TSX Global Gold Index ETF (TSX:XGD).
The XGD is one of the best ETFs because it tracks the S&P/TSX Global Gold Index, giving investors exposure to some of the largest and most established miners worldwide.
However, while it owns gold stocks worldwide, more than 63% of its holdings are allocated to Canadian gold stocks. That includes industry giants like Barrick Mining and Agnico Eagle, well-established multi-billion dollar companies with low costs, global operations, and the ability to generate profits even when gold prices dip.
Therefore, because most of its capital is invested in market leaders, the XGD ETF is less volatile than many other gold-focused investments, which is another reason why it’s so popular.
The ETF is designed as a core holding for Canadian investors who want steady exposure to the sector without having to invest in smaller, riskier gold stocks. Furthermore, it also has a small dividend yield of 0.53% which nearly offsets the 0.6% management expense ratio it charges.
So, if you’re looking to diversify your portfolio and allocate capital to the gold sector, the XGD ETF is certainly one of the best and most liquid options Canadian investors have.
A different type of gold ETF
In addition to an ETF like XGD that owns a basket of gold stocks, you could also consider a lower-risk ETF such as the iShares Gold Bullion ETF (TSX:CGL).
If you simply want exposure to the price of gold and a lower risk, lower volatility investment, then the CGL ETF is the choice for you. Instead of owning gold stocks like the XGD does, the CGL strictly owns physical gold bullion.
It still offers investors advantages, though. If you bought gold bullion, it’s nowhere near as liquid as the ETF would be. In addition, the spreads on bullion are much larger. Furthermore, storing gold can be costly and eat into your long-term capital appreciation.
So, if you’re looking to gain or increase your exposure to gold, but don’t want the increased volatility of mining stocks, the CGL ETF is one of the best to consider.
