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By Jared Cummans

Gold is not only one of the most popular commodities in the world, but it is also one of the most widely traded financial instruments. Traders and investors utilize gold for its safe haven behaviors, its speculative power, and its high liquidity given its popularity. Some use futures contracts for gold exposure, while others prefer stocks.

Recent years have seen exchange-traded funds (ETFs) fall into the mix. These highly liquid and transparent assets have democratized gold investing so that even the smallest of investors can still maintain a healthy exposure to the precious metal. Below, we outline four facts about gold ETFs to help you get a better understanding of these products.

1. Unique Tax Treatment: The standard tax rates for ETFs are 35% for short-term holds (less than one year) and 15% for long-term investments (more than one year). But gold ETFs are taxed at different rates. The SPDR Gold Trust (NYSEARCA:GLD) is taxed as if investors held the underlying gold themselves, meaning the collectibles rate of 28%. The DB Gold Fund (NYSEARCA:DGL), a commodities pool that holds futures contracts, is taxed at a blended rate between short-term and long-term capital gains that generally works out to about 23% for both short- and long-term investments. The E-TRACS UBS Bloomberg CMCI Gold ETN (NYSEARCA:UBG), an exchange-traded note, doesn’t actually hold anything; it’s a debt security whose underlying value fluctuates based on the performance of a specified index. The ETN structure introduces credit risk to the equation -- UBG is a debt of UBS -- but it also brings some potentially advantageous tax treatments to the table. Specifically, positions in UBG held for longer than a year will be taxed at the long-term capital gains rate of 15%.

2. Different Styles: For those new to the ETF world, there are various styles of gold ETFs to fit your investment objectives. The most popular, by far, are the physically backed funds. This category will include GLD, IAU, SGOL, and AGOL for the time being. Note that both SGOL and AGOL hold gold in vaults in Switzerland and Singapore, respectively. Next come the futures-based gold ETFs, which hold gold contracts in an effort to make futures investing easier for the average investor. This category includes ETFs like UBG and DGL. Next, there are leveraged/inverse options. Note that these funds are particularly dangerous and should only be utilized by traders who fully understand the risks and complexities that go into investing. That being said, investors can utilize funds like DGP, GLL, UGL, DZZ, and more. Finally, there are unique strategy funds that utilize benchmarks that employ one-of-a-kind methodologies. Investors looking to put a spin on their gold holdings should look to products like TBAR and FSG.

3. Physical Conspiracy: One of the biggest points of contention for physical ETF investors is that many accuse funds like GLD and IAU of not actually holding the amount of gold that they say they do. In recent years, there has been a significant amount of backlash from individual investors claiming GLD to be a sham and stating that the fund is nothing more than "paper gold." The issue is one that remains divided, as many swear by the fact that GLD is a complete fraud (note that this would mean the fund would be a $64 billion fraud, as GLD is one of the biggest funds in the world). Still others fully trust the product and feel that the conspiracy theories are nothing more than entertaining folklore. While we cannot say for sure which side of the argument is correct, investors would do well to research prior to investing.

4. Redemption Only in Cash … For Now: For the time being, gold ETFs can only be redeemed for cash (another issue that feeds the conspiracy fire). Note that this is for the average investor; those who have a hefty holding in funds like GLD do have the option for physical redemption, but it is a painful process and requires somewhere in the neighborhood of 100,000 shares, or a total of $15.6 million. Many investors have been calling for a fund that allows for simple physical gold redemption upon sale, but no such ETF has hit the market. That may soon change, however, as Merk Investments filed for a gold-redeemable fund earlier this year. "The Merk Gold Trust, which will trade under the symbol OUNZ, will hold London 'good delivery bars' as well as other gold bars and coins with a minimum purity of 995 parts per 1,000, according to the filing. The ETF's net asset value (NAV) will be determined at the end of the London trading day, meaning its price in New York could at times deviate from the end-of-day NAV," writes Oliver Ludwig.

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Disclosure: No positions at time of writing.

Disclaimer: Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

Source: What Is A Gold ETF? Four Facts That May Surprise You