Everything You Need to Know About Gold ETFs

Gold ETFs are a type of investment fund that holds gold-backed assets, such as physical billion or shares in gold mining companies. They allow investors to benefit when gold prices rise without having to actually buy physical gold. If you’re curious about this gold investment and how it works, in this article we share everything you need to know about gold ETFs.

Key takeaways:

• When you buy a gold ETF, you own a share in physical bullion or a company in the gold mining industry.
• Gold ETFs can easily be bought and sold throughout the day, just like stocks.
• Benefits of gold ETFs include convenience, liquidity, and fractional ownership.
• Drawbacks of gold ETFs include counterparty risk, tracking errors, and lack of physical ownership.
• Ultimately, whether you invest in gold ETFs or physical gold depends on your investment goals, budget, and priorities..

What are gold ETFs?

Gold exchange-traded funds (ETFs) are investment funds that hold gold-backed assets, like bullion or futures contracts, and are traded on a stock exchange. They provide a way to invest in gold without having to own the physical metal.

Just like stocks, gold ETFs are available in shares which can be traded throughout the day. Buying shares of a gold ETF is essentially the same as buying a portion of the gold held by a fund. This means that you won’t actually own the physical gold itself, but a share of the ETF that represents a certain amount of gold. For example, if you buy a share of a gold ETF that holds 50 ounces of gold, then you effectively own 1/50 ounces of gold.

The price of gold ETFs is directly linked with the price of gold - so if gold’s price increases by 1%, the value of a gold ETF would also increase by 1%. As of June 2024, the largest gold ETF is SPDR Gold Shares (GLD) which holds nearly $63 billion in assets.

See more: Why Buy Gold? Reasons to Invest in Physical Gold Bullion

Types of gold ETFs

There are different types of gold ETFs: those that invest in physical gold, those that invest in shares of gold mining or related companies, and those that use gold derivatives and debt to leverage gold’s price into potential returns. Let’s look at each type of gold ETF in more detail.

ETFs that invest in physical gold

These ETFs directly buy and hold physical gold bullion. The value of the ETF shares will reflect the current market price of gold. These types of gold ETFs offer exposure to gold without having to own the precious metal yourself and don’t require a significant investment to buy-in. Because of their ease of buying and selling, they’re also more liquid than physical gold.

ETFs that invest in stocks of gold companies

These gold ETFs don’t actually hold the physical metal but invest in stock of companies that mine and produce gold. The performance of these ETFs will depend on the profitability and stock prices of the mining companies, which can be influenced by market conditions, mining costs, and other factors.

Leveraged gold ETFs

These types of gold ETFs rely on derivatives and debt to enhance the market movement of the underlying gold. They can provide bigger returns than other gold ETFs but also carry higher risk. Because of the high risk involved, leveraged gold ETFs are only recommended for experienced investors.

Advantages of investing in gold ETFs

There are many benefits to investing in gold: it offers a hedge against inflation, it's a reliable store of value, and it's a safe haven asset that can protect investors during economic instability and downturns. But why invest in gold ETFs versus physical gold?

To help you determine whether this type of gold investment is for you, let’s look at the benefits of investing in gold ETFs compared to physical gold.

You can invest small amounts

Investors with a small budget might find gold ETFs more accessible than buying physical gold. This is because gold ETFs enable fractional ownership. This means you can invest small amounts and gradually increase your holdings over time. With physical gold, on the other hand, you may need to make a larger initial investment and it may be less cost-effective to slowly increase your holdings. This makes gold ETFs more accessible to a broader range of investors, especially those who don't have the capital to buy large amounts of physical gold upfront.

You don’t need to worry about storage & security

Investing in physical gold requires careful consideration about secure storage. Some people may need to invest in a home safe, pay to rent a safe deposit box or vault in a bank, and take out insurance to protect their assets. This all adds extra cost to the initial gold investment.

With gold ETFs, you don’t need to worry about storage or security as you’re not holding the physical gold yourself. This allows investors to benefit from gold without needing to consider or pay for security and storage.

See more: What is the Proper Way to Store Gold?

They’re conveniently bought & sold

Gold ETFs can easily be bought and sold through a regular brokerage account, just like stocks. The process is typically simple and transactions happen in real-time during market hours. Unlike buying physical gold, you don’t have to worry about logistics like shipping, authenticity verification, and communicating with dealers. This convenience makes gold ETFs an attractive option for investors who prioritize swift buying and selling.

They're more liquid than physical gold

Because gold ETFs can be traded on major stock exchanges, they can be easier to buy and sell compared to physical gold. While physical gold is already a highly liquid asset, selling can be a slower process that requires finding a reliable buyer, receiving a good offer, and safely transporting your gold.

If you own larger amounts of gold, such as a 500g gold bar, it can also be more difficult to extract partial value from them. For example, you won’t be able to sell off just a small amount of your gold. With gold ETFs, however, you can easily buy and sell your units at any amount you desire.

Read more: When is the Best Time to Buy and Sell Gold?

Drawbacks of investing in gold ETFs

Despite the many benefits of investing in gold ETFs, there are also several drawbacks. It’s important to be aware of both the benefits and risks when deciding if gold ETFs are for you.

Lack of physical ownership

For some people, the lack of physical ownership makes gold ETFs more convenient and accessible as you don’t have to worry about logistics and storage. For others, the lack of physical ownership is a disadvantage. One of the main benefits of investing in gold is that it offers the security of holding a tangible asset that provides a store of value separate to fiat currencies. Gold ETFs don’t offer this advantage.

Keep reading: How to Invest in Gold as an Inflation Hedge

Potential for tracking errors

While gold ETFs are designed to track the price of gold, they might not always perfectly match its price movements. There can be small margins of error, known as tracking errors, that create a difference between the price of a gold ETF and gold’s actual spot price. Tracking errors will differ between different funds.

Keep reading: What Drives the Price of Gold?

Counterparty risk

Another benefit of holding physical gold is that it carries no counterparty risk. You have the asset in your possession and are in complete control over it. Gold ETFs, on the other hand, involve counterparty risk. This is the risk that the company behind the gold ETF may default on obligations.

Investors in gold ETFs should ensure the company behind their investment is sufficiently capitalized and has an established track record. If the fund’s sponsor goes bankrupt or faces other financial difficulties, it can affect or diminish the value of your investment.

Complex investments

Some investors, particularly those who are new, may find gold ETFs complicated to navigate. There are different types of gold ETFs that offer different objectives, and each can be structured differently with varying risk profiles. This can make investing in gold ETFs more complex than owning physical gold, which is relatively straightforward.

Influenced by market conditions

Like any security traded on stock exchanges, gold ETFs can experience price fluctuations due to market conditions. Their prices can be influenced by market sentiment, economic conditions, and other external factors.

How to invest in gold ETFs

Investing in gold ETFs is a simple process that can be done through a brokerage account, robo-advisor, or stock trading apps. To help you get started, let’s look at how to invest in gold ETFs.

Step 1: Find the gold ETF you want to invest in

There are many gold ETFs out there, each with varying objectives and risk profiles. Think about which type of ETF is best for you: those that are backed with physical gold or those that invest in shares of gold-related companies.

Once you know what type of gold ETF you’re looking for, you can begin browsing through your preferred brokerage or stock trading app. You should be able to see the biggest or most popular gold ETFs, which may be an ideal option for your first investment.

Step 2: Analyze the ETF’s performance

When you have a shortlist of potential gold ETFs, it’s a good idea to research each fund online. Examine their underlying assets, performance over the last several years, expense ratio, and liquidity. This information will be available in the fund’s prospectus, which you can find on their website. Alternatively, you may want to engage a financial advisor to provide you with unbiased, tailored advice.

Step 3: Buy your gold ETF

Once you’ve chosen the best gold ETF for your investment goals, you can make the purchase. This is typically done by placing a market or limit order through your brokerage account, just like any other ETF or stock.

Investing in physical gold vs ETFs

If you’re still unsure whether gold ETFs or physical gold is a better investment for you, let’s compare the major differences between them.

	PHYSICAL GOLD	GOLD ETFS
BOUGHT & SOLD	From government & private mints, precious metals dealers, and jewelers.	On stock exchanges.
TYPE OF INVESTMENT	Direct investment that you physically own.	Indirect investment that you own shares of.
TANGIBILITY	Gold is a tangible asset that you can hold in your hand. This provides more assurance for some investors.	Gold ETFs are intangible, meaning you cannot physically see, touch, or hold them. This is uncomfortable for some investors, especially during market volatility.
COUNTERPARTY RISK	No counterparty risk as you have full control over your investment.	Gold ETFs carry a counterparty risk, which means if the issuer defaults you can lose some or even all of your investment.
TRANSACTION COSTS	You’ll often have to pay a small premium over the spot price of gold when buying physical gold. When you sell, you’ll also usually receive less than the spot price due to commissions.	You’ll usually have to pay a small commission to your broker when buying & selling gold ETFs, however these tend to be lower than costs associated with gold. Keep in mind, however, that gold ETFs often have tracking errors which means you may not get the full benefit of gold’s increasing value.
STORAGE & SECURITY	Owning physical gold comes with added security & storage considerations to keep your investment protected.	Gold ETFs don’t require any consideration for storage & security.
LIQUIDITY	Selling physical gold is generally easy as there are always buyers. However, it doesn’t offer the instantaneous selling that you can get with gold ETFs.	Like stocks, gold ETFs can be bought and sold quickly and easily throughout the day.
RETURNS	Value depends mainly on gold’s current spot price.	Value depends on the price of the ETF.

Summary: Everything you need to know about gold ETFs

Gold ETFs provide a convenient and cost-effective way to gain exposure to gold without having to own the physical metal yourself. They offer several advantages, including easy trading, no storage or logistical considerations, high liquidity, and the ability to invest in fractional amounts. However, they also come with drawbacks, including counterparty risk, tracking errors, management fees, and lack of physical ownership.

For some investors, the benefits of gold ETFs outweigh the drawbacks and make an attractive option for gold investment. That said, no other investment provides the unparalleled security, control, and intrinsic value offered by owning physical gold. Investing in gold bullion bars and coins ensures your wealth is protected and easily accessible when you need it most.

If you’re ready to start investing in gold, you’re in the right place. At StoneX Bullion, we have an extensive range of investment-grade gold bars, gold coins, and wearable bullion from the best-known mints in the world. You can monitor the price of gold while browsing so you're always aware of market changes and can make the most of your money. As affiliate members of the London Bullion Market Association (LBMA) you can trust us as a reliable partner for your gold investments. Browse our collection of precious metals to start growing and preserving your wealth today.