Physical Gold vs. Gold ETFs - Which is More Cost-Effective and Convenient?
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Physical Gold vs. Gold ETFs - Which is More Cost-Effective and Convenient?

4 Min.

To buy gold, you can choose between physical bullion (bars or coins) or gold ETFs. Physical gold can be costly with commissions, taxes, storage, and security concerns. Gold ETFs offer a more liquid and cost-effective option, with some funds having low expense ratios.

Basics

Gold, a historical currency, commodity, and investment, remains popular with today's investors. It serves as a hedge against currency devaluation, inflation, and deflation, and offers a safe haven in times of economic uncertainty. Investors have various options to access the gold market. These include holding physical gold in the form of coins and bars or investing in exchange-traded funds (ETFs).

Investing in Physical Gold: A Direct Approach

Physical gold, referred to as bullion, is a direct way to invest in gold. Its value is determined by its weight and purity, regardless of any face value on coins. You can buy it from various sources like mints, dealers, or jewelers, but prices may vary, so research is essential to get the best deal. When buying physical gold, you pay the full price upfront.

However, keep in mind that owning physical gold involves additional costs such as storage, insurance, transaction fees, markups, and processing fees. These costs may not significantly impact small-scale investors but could become a hurdle for those seeking substantial gold exposure.

Investing in Gold Through ETFs: Convenience With Expenses

ETFs provide a convenient way to invest in gold like buying stocks on a stock exchange. They offer access to gold without the hassles of markups, storage costs, and security concerns associated with physical gold. However, there are expenses involved.

Investors should be aware of the expense ratio, and an annual fee covering management and administrative costs. For instance, the largest gold ETF, SPDR Gold Shares ETF, had a 0.40% expense ratio in mid-January 2023, costing $80 per year for a $20,000 investment.

Additionally, there are commissions for buying and selling ETFs. Online commissions are usually under $10, but active traders could accumulate significant costs. Some brokers offer commission-free trading for specific ETFs, such as Aberdeen Standard Gold ETF on the Schwab ETF OneSource platform.

There are numerous gold-specific ETFs available today, including inverse and leveraged options. It's important to note that investing in physically backed ETFs doesn't mean you own physical gold, and you can't redeem or sell shares for gold.

Affordable Gold Funds with Low Expense Ratios

As of January 2023, here are five affordable gold funds with low expense ratios. One of them is the iShares Gold Trust, which aims to track the daily price movement of gold bullion. It's backed by physical gold stored in vaults in Toronto, New York, and London. This fund, launched on January 21, 2005, has an expense ratio of 0.25% and holds over $27 billion in total net assets.

Here are some additional low-cost gold ETFs along with their details:

  1. Aberdeen Standard Gold ETF Trust (SGOL)
    • Launch Date: Sept. 9, 2009
    • Expense Ratio: 0.17%
    • Total Net Assets: Approximately $2.4 billion
    • Backed by physical gold in Swiss and U.K. vaults.
  2. GraniteShares Gold Trust (BAR)
    • Launch Date: Aug. 31, 2017
    • Expense Ratio: 0.175%
    • Total Net Assets: About $934 million
    • Invests in physical gold bullion, offering a low-cost option.
  3. SPDR Gold Shares (GLD)
    • Launch Date: Nov. 18, 2004
    • Expense Ratio: 0.40%
    • Total Net Assets: Over $56 billion
    • Designed to track the spot price of gold bullion, backed by physical gold assets in HSBC’s London vault.
  4. VanEck Gold Miners ETF (GDX)
    • Launch Date: May 16, 2006
    • Expense Ratio: 0.51%
    • Total Net Assets: Nearly $12 billion
    • Aims to replicate the performance of the NYSE Arca Gold Miners Index, which covers companies in the gold mining industry.

These ETFs offer various options for investors seeking exposure to gold, each with its own expense ratio and investment strategy.

The Cost and Liquidity of Physical Gold vs. Gold ETFs

Purchasing physical gold can be costly due to commissions, potential sales tax, storage fees, and security concerns. It can also be less liquid and challenging to sell. In contrast, gold ETFs offer a more cost-effective and liquid alternative. If you're considering regular investments, ETFs are an affordable way to execute your strategy.

Conclusion

Gold ETFs typically have lower transaction costs compared to buying, storing, and insuring physical gold. However, it's crucial to examine the associated expenses of each gold investment type to identify the most cost-effective and suitable choice for your portfolio.

Gold
Gold Fund
Gold ETF
Precious Metals
Commodities
SPDR Gold Shares ETF (GLD)
Aberdeen Standard Gold ETF Trust (SGOL)
GraniteShares Gold Trust (BAR)
VanEck Gold Miners ETF (GDX)
iShares Gold Trust (IAU)
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