Blocks reading "ETF" resting atop stacks of gold coins

ETFs vs. Physical Gold: What are you really buying?

Brad Chastain Director of Education U.S. Money Reserve

Written by Brad Chastain

May 14, 2024

When you invest in a gold ETF, what exactly are you acquiring, and how does it differ from possessing physical gold?

First and foremost, investing in a gold ETF does not grant you actual ownership of any physical gold nor a direct claim over any physical gold.

This is a common misconception many customers have: that owning shares of a gold ETF entitles them to a claim on any physical gold held by the ETF. Unfortunately, this is not the case. Any physical gold is held solely by the trust backing the ETF.

Instead, buying shares of a gold ETF is similar to owning stock in a company like Apple. Buying shares makes you an owner of the company, but that doesn’t mean you can walk into an Apple store and exchange your stock for a new iPhone.

Shares in a gold ETF do not offer a redemption option for physical gold; they can only be traded as a form of “digital paper” on the stock exchange. Only so-called “Authorized Participants”—entities like major banks who trade in tens of millions of dollars—can redeem their shares for physical gold held by the trust.

Taxes, Fees, and Performance

Owning a gold ETF comes with its share of expenses and tax implications—some which may surprise you. These funds incur operational costs, which are borne by you as a shareholder. For instance, one popular gold ETF, GLD, charges an annual fee of 0.4%, equating to $200 for every $50,000 invested. This fee is applied by liquidating a portion of the trust’s gold holdings to pay operating expenses.

This reduction in gold holdings impacts the ETF’s price and returns. For example, $50,000 invested in physical gold would have outperformed the same amount in the GLD ETF by more than $20,000 over the past two decades, underscoring the impact of these costs.

Furthermore, because an ETF’s fees are charged as a percentage of assets, the fees involved appreciate along with the price of the fund. For example, a $200 annual fee on an initial $50,000 investment in GLD would have ballooned to more than $806 in 2023 as the value of the fund grew. Over 20 years, this would equate to $10,443.34 in fees­—over 20% of the original investment amount.

Additionally, as the ETF liquidates its physical gold to help cover expenses, those sales result in capital gains, which are passed on to you and other shareholders each year. So unless that gold was held in an IRA, you could wind up paying taxes of up to 28% on those capital gains—even without selling a single share of the ETF.

This operating model—selling assets (in this case, gold) to cover operating expenses—can also wind up diminishing your original investment. When a share of a gold ETF is purchased, a certain amount of gold is in its fund and represents that investment. But over time, the amount of gold in the fund is reduced—as are any potential gains that gold may have realized.

For example, an initial investment of $50,000 in GLD would have represented 112.6 ounces of gold held in its trust in 2004. Today, those funds would represent only 104 ounces of gold. The 8.6 ounces sold to cover fees would be valued at $18,500 at current gold prices.

The prices for ETFs are based on demand. That includes gold ETFs.

If a large number of shareholders begin to sell a certain shares of a gold ETF, it could push the price of thefund below the value of the gold it holds. If you sell your shares when many other investors are also selling, you could risk receiving less for your shares than the market price of the underlying gold.

Physical gold experiences none of these weaknesses.

When you own physical gold, whether privately in your home or within a precious metals IRA, you are the sole owner of that gold and thus get to enjoy the direct protection and growth potential of those physical gold assets.

If you own gold within an IRA, there may be account fees involved, but they are not based on the market price of your gold. A gold IRA also gives you total control over when any assets are sold, and in the case of a traditional gold IRA, where pretax funds are contributed, taxes would not apply until you begin taking distributions. For gold physically in your possession, taxes may only apply when that gold is sold—again, only at your discretion or that of your heirs.

And while global demand can factor into the market price of gold, wild swings in demand for ETFs will not impact the market price of your physical gold. Similarly, a huge market correction or crash may impact the price of gold ETFs along with the rest of the stock markets but would likely have no direct impact on the price of privately owned gold.

How to decide which is right for you

Ultimately, the choice of how you want to invest in gold is up to you. But as you can see, a number of factors  may require consideration. Those hoping to take the “easy route” and go through the stock market may be surprised to learn what they’re really buying and what it may cost them in the long term. Meanwhile, there is only one way to fully experience all the protection, growth, and diversification benefits of gold—and that’s by owning the real thing.


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