Short on time? Here’s what to expect from the article:

• Malaysia’s gold ETFs let you start small, just a gram’s worth, versus bars costing hundreds of thousands.
• Shariah-compliant gold ETFs are fully backed by physical gold, avoiding riba and excessive speculation.
• Unlike selling coins or large gold bars, ETFs trade on Bursa Malaysia, giving instant cash access.

Understanding how gold ETFs work

A gold ETF is an investment product (or exchange-traded fund) that tracks the price of gold. It could include shares of companies in the gold mining industry or contracts linked to the future price of gold.

Each ETF consists of different types of assets (stocks, bonds or commodities) and a breakdown of the ETF’s top 10 holdings is usually shared in the fund’s factsheet. When it comes to gold ETFs, it’s important to remember:

• Value is always tied to the price of gold
• Investors do not take possession of the metal and proceeds are paid in Malaysian Ringgit (MYR) when units are sold

Since they are traded on stock exchanges like Bursa Malaysia, they can be bought and sold similarly to shares. This explains why gold ETFs are often considered alongside other investment instruments, such as bond investments, to build a balanced and diversified portfolio.

Why consider gold ETFs

Gold ETFs are seen as a safe and affordable investment option due to the following reasons:

Affordable entry point into gold

Buying a gold bar is costly and can cost hundreds of thousands of Ringgit. By contrast, one unit of a gold ETF may only represent the equivalent of a gram of gold, making it far easier for buyers to gain exposure to gold.

Storage and protection

Physical gold requires a safe place to keep it, such as a bank vault, which adds to costs. Storing gold at home is risky. With gold ETFs, none of these logistical concerns apply because you never hold the physical item.

Lower costs compared to unit trusts

Instead of being actively managed like a traditional fund, gold ETFs follow the price of gold. This passive nature keeps fees much lower compared to unit trust funds, and lower costs have a more minor impact on ROI.

Higher liquidity

Selling physical gold can be complicated, as jewellers may deduct artistry costs. Large gold bars also make it difficult to liquidate small amounts. Gold ETFs, however, can be sold instantly via your broker or trading app, allowing you to convert holdings into cash with greater flexibility.

Key considerations when buying gold ETFs 

While gold ETFs have their advantages, there are also specific points to keep in mind:

• Price tracking may not be perfect: The ETF may not precisely match the spot price of gold, which may result in a “tracking error” (the difference an investor receives from the returns of an index fund versus the targeted index).
• No physical asset ownership: Investors seeking tangible gold as a store of value may prefer jewellery, gold coins, or bars.
• Reliance on the issuer: ETFs are managed by financial institutions, so investors need confidence in the provider’s economic health.

What is a Shariah-compliant gold ETF?

For Muslims and socially conscious investors, there is also the option to invest in Shariah-compliant gold ETFs which adhere to Shariah principles by avoiding interest (riba) and speculative practices (gharar). They are fully backed by physical gold bullion with specified quantity and quality, held by custodians throughout the tenure of fund.

Why consider Shariah-compliant gold ETFs

Besides the factors listed above for regular gold ETFs, the following factors below explain why Shariah-compliant gold ETFs are considered an attractive alternative:

• Adherence to Shariah principles: Shariah-compliant gold ETFs avoid investments involving prohibited elements like interest and excessive speculation. These ETFs invest in businesses which do not engage in Shariah non-compliant activities such as gambling, interest-based transactions, pork selling, and alcohol consumption.
• Backed by physical gold bullions: Shariah-compliant gold ETFs are backed by physical gold bullions of specified quantity, representing the unitholders’ ownership.

Where to buy gold ETFs in Malaysia

Gold ETFs can be purchased through licensed brokers or banks that offer trading services. Most major banks and brokerage platforms allow gold ETF trading online. On Bursa Malaysia, for example, investors also have the option to access products that provide Shariah compliant exposure to gold prices.

Is a gold ETF the right choice for you?

Gold ETFs are a convenient way for Malaysians to diversify their investments without incurring added storage and insurance costs. Investors can also invest in gold ETFs if they have a smaller capital, which makes them attractive in times of economic uncertainty.

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