Gold Bugs of the World, Rejoice

In case you missed it, after a lot of hemming and hawing, a gold ETF finally began trading on Nov. 18: the StreetTracks Gold Trust (NYSE:GLD). The price of a share represents 1/10 of the price of an ounce of the yellow metal, save for the 0.40% annual expense.

Not to be outdone, Barclays also has a gold ETF in the works that is likely to debut soon on the American Stock Exchange. Although StreetTracks Gold is the first U.S. gold ETF, the Australian Stock Exchange became the first to market with this type of product in 2003. Since then both the London and the Johannesburg exchanges have started similar investment vehicles.

The market has been introduced to many new ETFs this year. Most of the latecomers have been met with a yawn in terms of volume, but so far the StreetTracks Gold Trust has been wildly popular, averaging 7 million shares traded per day.

Accessing the commodities markets is very difficult for most individual investors. There are issues with potentially having to take delivery, complex leverage with commodity futures, and more intricate pricing than in equity investing. Commodity-based exchange-traded funds reduce those risks and leave the individual investor needing only to figure out direction and volatility.

Another important benefit is accessing the gold market itself. I have written about the potential diversification benefits of investing in gold through shares of gold mining companies. While mining shares have historically captured most of the effect of gold, the correlation is not perfect. StreetTracks Gold will tack much closer to the underlying commodity price.

StreetTracks Gold Trust is actually backed by bars of gold stored in a warehouse. The fund, in conjunction with the World Gold Council, has to buy gold to create shares of the ETF. In the short time since the ETF started trading, the price of gold has moved higher because of the demand created by the fund. The recent drop in the dollar has also created demand for gold. The interesting thing has been that money has come out of mining shares and into the ETF, no doubt because it provides a more direct investment. This can be seen in StreetTracks Gold Trust's recent outperformance of the AMEX Gold Bug Index (AMEX:HUI). Most people don't need mining shares and a gold ETF.

Are ETFs the "it" equity? To learn more about them, take a look at the Fool's new ETF Center.

Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.