Five years ago investors could not effectively invest in gold, but the expansion of the ETF market has completely changed. Gold as a commodity has to be traded through the futures market, as well as options markets which is why a physical gold bullion ETF is so convenient for the average investor.  While gold and oil each have their own ETFs however many other types of commodities do not.

Gold has proven that it is a “safe haven” and an investment that will always appreciate in value over the long term and especially during trying economic situations and hard times. Uncertainty in the market has allowed gold to become a valuable hedging option alongside long term portfolio diversification. As a hedge towards the dollar, gold is very effective and many investors who are uneasy retaining their holdings in U.S. currency, also own Gold ETF’s.

Due to the growing ETF market, Gold ETF’s in particular, have become an effective way of investing in a metal, without having to actually possess the gold. So how do ETF’s actually work?

First of all you need to know that not all gold ETF’s are equal and here are a few factors to consider when you plan to invest in them. Some physical gold ETF holdings come in the form of gold bars or gold bullion, others are futures contract investments. Other ETF’s track the spot price of gold, and this type of bullion ETF is completely dependent on the price of bullion. Gold is also an effective “dollar hedge,” since gold rises in price, as the dollar price plummets and investors become uneasy holding onto the U.S. currency.

As this yellow metal continues to reach greater heights, investors are also flocking in masses to get their share of the gold market; some for fear of inflation and deflation, others for reasons of diversification.

Listed on a stock exchange where shares of listed companies are traded, ETFs can be index-driven, focusing on specific indexes or sectors.

In general, etf investing will diversify your investment risks by buying into a basket of different stocks. In this way, if the value of a particular stock in the basket dips, the rest can easily make up for the loss through their individual gains.

As an example, one ETF invests in stocks of the top 30 construction companies in your country in proportion to the respective index weights of each stock. You can imagine the amount of leverage generated when a large group of like-minded investors put in a small amount each into this ETF.

So rather than keep all your cash in a local bank earning a low interest return, you may wish to place a portion of your cash reserves in different Exchange Traded Funds. First you’ll want to understand the benefits of investing in an ETF and make sure you know the disadvantages as well.