What are gold ETFs?

How do gold ETFs work?

ETFs are investment funds that pool money from investors to purchase assets, such as stocks, bonds, commodities or other investments. Investors who buy ETF shares benefit from the value of the underlying investments. Unlike mutual funds, ETFs can be actively traded during market hours, making them more liquid than most other types of investment funds.

Gold ETFs invest in physical gold or gold futures contracts to track the price of gold. Most are passively managed, meaning they don’t try to buy and sell gold to beat the market. Instead, they just hold gold or contracts as part of the fund’s assets. This exposes investors to the price of gold without having to purchase it themselves.

Gold ETFs are available through most investing brokers and apps, allowing you to add gold to your investment portfolio quickly and easily. You may even be able to purchase gold ETFs inside a retirement account, allowing you to save on taxes while adding gold to your investment portfolio.

» 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 in Saratoga Springs, New York.

“[Some choose gold ETFs] strategically, as part of a diversified portfolio where each component is meant to behave differently than the others, or tactically, as part of a shorter-term “bet” on the future of gold prices. 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 continued.

Gold is a unique asset, as it doesn’t necessarily correlate with traditional markets. In fact, when markets are in turmoil or there’s uncertainty about futures, many investors flock to gold as a “safe haven” asset. This has caused gold to perform well when financial markets are volatile.

It’s also seen as a hedge against inflation, as it holds its purchasing power while national currencies become less valuable over time. This makes it a store of value for some investors.

Whatever the reason, investing in gold adds a layer of diversification to your portfolio, and gold ETFs make it much easier to access than buying physical gold.

» COMPARE: Find the best gold ETFs

How to invest in gold ETFs

Investing in gold ETFs is very similar to investing in the stock market. You can fire up your favorite investing app or log into your online broker to browse options and choose one that best fits your investment goals.

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

1. How much? Determine what amount you plan on investing in gold ETFs based on your investing goals and budget.
2. Research gold ETFs. Review the different options—including expense ratios and share prices—to determine which one best suits your investment portfolio.
3. Open an investment account (if needed). If you haven’t signed up for a brokerage account through an online broker or investment app, you’ll need to open one before investing in gold ETFs.
4. Buy shares. You can buy gold ETF shares for the price of a single share. If your investment platform offers fractional share investing, you may be able to invest smaller amounts to own a portion of a gold ETF share.
5. Plan for taxes. If you’re investing within a brokerage account, you’ll want to plan ahead for the tax implications of buying and selling gold ETFs.

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 gold hasn’t historically performed better than the stock market over the long run. Plus, some may prefer taking custody of their own gold investment, and gold ETFs don’t allow for this.

Here are a few pros and cons of gold ETFs:

How do gold ETFs compare to other gold investments?

Gold ETFs offer 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

Physical gold backs Gold ETFs, allowing you to purchase shares that track the spot price of gold. On the other hand, gold stocks are publicly traded companies that mine or process gold, exposing you to businesses that make money off of discovering, mining, processing, and selling gold.

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 of the larger gold miner companies do pay them.

Gold ETFs vs. physical gold

Gold ETFs and physical gold follow the spot price of gold per ounce. Gold ETFs typically hold physical gold in secure storage facilities to back investor shares of the ETF itself. However, while you can easily buy and sell gold ETFs online, buying and selling physical gold is more involved. This may not bother you if you prefer taking custody of your gold investment, which can’t be gold with a gold ETF investment.

Gold ETFs typically have expense ratios that cover the fund's costs as well as gold storage and insurance costs. Buying and selling physical gold typically involves markup, shipping, and storage fees. Additionally, gold ETFs may have slightly lower overall fees, depending on the size of your investment and the expense ratio.

Gold ETFs vs. gold futures

While gold ETFs simply track the spot price of gold and back investor shares by holding physical gold, gold futures are contracts to buy or sell gold at a predetermined price in the future. Future trading is buying or selling a specific gold futures contract, allowing investors to speculate on the future price of gold without ever owning it.

Gold ETFs are better for long-term gold investors who want to buy and hold shares of the funds within their investment portfolio. Gold futures are for day traders and speculators to capitalize on the price movement of gold.

» MORE: Physical gold vs. ETFs (2024)

Bottom line

Investing in gold ETFs can provide diversification outside of traditional markets, give you a hedge against inflation, and help boost your portfolio in times of 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 a long period of time. Also, some investors may not prefer holding 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.