What Are Gold ETFs?

How do gold ETFs work?

ETFs are investment funds that pool capital from investors to purchase underlying assets, such as stocks, bonds or commodities. When you buy shares in a gold ETF, you benefit from the value of the underlying gold held by the fund. Unlike mutual funds, ETFs are highly liquid and can be actively traded throughout the day.

Most gold ETFs are passively managed; they consistently correlate with the spot price of gold.

Most U.S. gold ETFs are passively managed, meaning the fund managers don’t try to beat the market by timing gold purchases. Instead, they simply hold physical gold or gold futures contracts to track the spot price per ounce. This structure allows investors to gain price exposure without the markup fees often associated with retail gold dealers.

Gold ETFs are generally available through standard brokerage accounts, and some can also be held in tax-advantaged retirement accounts like 401(k)s or IRAs. The exact trading experience depends on the exchange, the fund’s liquidity and the broker you use.

» LEARN: How to invest in gold

Who should consider investing in gold ETFs?

“There are two main circumstances in which an investor would choose a gold ETF,” said David Rath, chief investment officer at Continuum Wealth Advisors.

Rath noted that some choose these funds strategically as part of a diversified portfolio meant to behave differently than stocks or bonds. Others use them tactically for shorter-term "bets" on the direction of gold prices.

Note that, while gold ETFs can feel like a safer place to park money during market stress, they still carry price risk. Because they don’t pay dividends or interest, they’re usually better used as a hedge or diversifier than as a main growth investment.

“As part of a strategic allocation, anything up to 10% would get you the potential diversification benefits without being too concentrated in an investment that is prone to high volatility and long periods of underperformance,” Rath said.

» COMPARE: Find the best gold ETFs

How to invest in gold ETFs

Investing in gold ETFs is essentially the same as buying shares of a company listed on the stock market, such as Apple or Amazon. You can access these funds through most online brokers and investment apps.

Here’s a simple step-by-step guide to investing in gold ETFs:

1. Determine your allocation: Decide what portion of your portfolio to allocate to gold based on your risk tolerance and goals. Above, Rath recommended up to 10% for diversification without over-concentration.
2. Research specific funds: Review different ETFs to compare elements like their expense ratios (the annual fee for managing the fund), assets under management and share prices.
3. Open a brokerage account (if needed): If you don’t already have one, you’ll need to open a standard brokerage account or an Individual Retirement Account (IRA) before investing in gold ETFs.
4. Place the order: Buy shares at the current market price during trading hours. If you’re starting with a smaller budget, many modern brokers allow you to buy a portion of a share, called a fractional share, rather than paying the full share price.
5. Plan for taxes: Gold ETFs held in taxable accounts are often treated as "collectibles" by the IRS, which can result in a higher long-term capital gains tax rate than standard stocks. Tax rules can differ, so read the prospectus carefully before buying.

Pros and cons of gold ETFs

Gold EFTs offer a great way to gain exposure to gold prices without the hassle of buying physical gold. You can purchase gold ETFs through most investing apps and online brokers, and most offer accessible share prices that lower the barrier to entry to becoming a gold investor.

But gold ETFs aren’t for everyone, and they’re not automatically superior to other asset classes. While they track a tangible asset, gold has no dividend stream. It can lag stocks over long periods and may be more volatile than some investors expect.

Here are a few pros and cons of gold ETFs:

How do gold ETFs compare to other gold investments?

Gold ETFs are one way to gain direct exposure to the spot price of gold, but they’re not the only way to invest in gold. Here’s how gold ETFs compare to other types of gold investments.

Gold ETFs vs. gold stocks

Gold ETFs track the price of gold itself, while gold stocks are shares of gold mining or processing companies. That means gold stocks can rise or fall for reasons beyond the metal price, including operating costs, reserves, management and production issues.

While gold ETFs are valued based on the market supply and demand of gold, gold stocks are valued based on companies' profits and other financial metrics. And while gold ETFs don’t pay out dividends, some large-scale mining stocks pay regular dividends.

Gold ETFs are usually the cleaner choice if you want direct commodity exposure rather than equity exposure.

Gold ETFs vs. physical gold

Gold ETFs and physical gold each follow the spot price of gold per ounce. Physical gold gives you direct possession, but it comes with storage, insurance and liquidity challenges. Gold ETFs generally solve those problems by holding bullion on your behalf and letting you trade during market hours.

Gold ETF fees cover fund management, gold storage and insurance costs. Buying and selling physical gold typically involves markup, shipping and storage fees. Gold ETFs may have slightly lower overall fees, depending on your investment size and the expense ratio.

That convenience comes with another trade-off: you own shares in a fund, not the metal in your hand. For some investors, that's ideal. Others say it's the main reason to choose physical bullion instead.

Gold ETFs vs. gold futures

Gold futures are legally binding contracts to buy or sell gold at a set price on a specified future date, making them useful for hedging and speculation. Futures are typically used by speculators and day traders to capitalize on rapid gold price movements, and they’re significantly more complex than ETFs.

Gold ETFs are generally designed for long-term "buy and hold" investors, and futures are more complicated than most of these investors want in their portfolios. Gold ETFs are usually easier to understand and hold if the goal is simple gold exposure rather than active trading.

» MORE: Physical gold vs. ETFs (2024)

FAQ

Bottom line

Investing in gold ETFs can provide diversification outside traditional markets, offer a hedge against inflation and help boost your portfolio during economic turmoil. They are simple to purchase and available on most investing platforms.

But gold ETFs don’t pay dividends and typically don’t outperform the stock market over long periods. Some investors may also prefer to hold the physical asset itself.

“Gold ETFs can make sense as a piece of a larger portfolio, but one must be aware of what they entail and what the expectations are for them,” said Rath.

It’s always a good idea to meet with a licensed investment advisor to review your investment goals and build a portfolio that may (or may not) include gold ETFs based on your goals, timelines and risk tolerance.