Gold ETF vs. physical gold: Which investment is better for you?

Investing in gold doesn’t have to mean buying gold bars or coins. Gold exchange-traded funds (ETFs) offer a way to gain exposure to gold prices without purchasing, storing or insuring the physical metal.

Both options can help diversify your portfolio, but each comes with different costs, risks and tax considerations. Here’s how gold ETFs and physical gold compare — and what to consider when deciding which investment is right for you.

Gold ETFs vs. physical gold at a glance

The biggest difference between gold ETFs and physical gold comes down to ownership. When you invest in a gold ETF, you buy shares in a fund or trust that tracks the price of gold. When you buy physical gold, you own the actual metal in the form of coins or bars.

Here’s a quick look at how these types of gold investing work:

What is a gold ETF?

A gold exchange-traded fund (ETF) lets you invest in gold without buying or storing the physical metal. You can purchase shares through a brokerage account and trade them on stock exchanges, much like individual stocks.

Many popular gold ETFs hold physical bullion in secure vaults, with share prices generally tracking the value of that gold, minus fund expenses. However, owning shares doesn’t give you direct ownership of the metal, and most individual investors can’t redeem their shares for physical gold.

Not all gold ETFs work the same way. Some track gold prices using futures contracts, while gold mining ETFs invest in companies that produce the metal rather than gold itself.

Gold ETFs can be held in taxable brokerage accounts or traditional and Roth IRAs, making them a relatively accessible way to include gold in your retirement investment strategy.

How much do gold ETFs cost?

Gold ETFs typically charge an annual expense ratio to cover operating and management costs. These fees are deducted from the fund’s assets, so they reduce your investment returns over time.

For example, a gold ETF with a 0.25% expense ratio would cost about $25 a year for every $10,000 invested, assuming the investment’s value stays the same.

Expense ratios aren’t the only costs to consider. You may also pay brokerage commissions or incur trading costs through the difference between a fund’s buying and selling prices, known as the bid-ask spread.

The Securities and Exchange Commission requires registered ETFs to disclose their fees and expenses, although disclosure rules differ for some physically backed gold trusts. Review a fund’s prospectus before investing so you understand what you’ll pay.

What is physical gold?

Investing in physical gold means purchasing the metal itself, typically as coins or bars. You can purchase gold through a precious metals dealer and store it at home, in a safe-deposit box or with a private vaulting service.

Unlike a gold ETF, physical gold gives you direct ownership of the metal rather than shares in an investment fund. You have control over where and how it’s stored and when to sell it without relying on a fund to manage your investment.

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How much does physical gold cost?

When you buy physical gold, you’ll generally pay a premium above the current market price, known as the spot price. This dealer premium varies depending on the type of gold, the dealer and the size of your purchase.

Selling gold can also come with costs. Many precious metals dealers offer buyback programs, making it easier to sell your gold directly to them. However, buyback prices vary and may be below the spot price, so it’s worth comparing offers to get the best deal.

Depending on how you store and protect your gold, you may also pay for secure storage, insurance, shipping or authentication. Unlike gold ETFs, physical gold doesn’t carry an annual fund expense ratio.

Key differences between gold ETFs and physical gold

Gold ETFs and physical gold both offer ways to invest in the precious metal, but the experience of owning and managing each investment is different. From how you access your money to the risks and costs involved, these distinctions can affect which option makes the most sense for your portfolio.

Here’s how the two investments compare in the areas that matter most.

Ownership and risk: Physical gold vs. gold ETFs

Both physical gold and gold ETFs expose investors to changes in gold prices, but they come with different risks and responsibilities. Neither is inherently the better choice. Much depends on how you prefer to own and manage your investment.

• Physical gold risks: Direct ownership gives you control over your investment without relying on a fund or brokerage account. However, you’re responsible for keeping your gold secure, whether you store it at home or pay a third-party depository. Theft, loss, counterfeit products and storage costs are important considerations.

• Gold ETF risks: ETFs eliminate the need to personally store or insure bullion, but you’re relying on the fund’s management, custodians and other financial intermediaries. Fund fees and trading costs can also reduce returns, and ETF shares don’t typically give individual investors the right to take possession of physical gold.

• Market risks: Both investments can lose value when gold prices fall. Neither physical bullion nor physically backed gold ETFs generate regular investment income, so returns generally depend on rising gold prices. Gold mining ETFs carry additional risks tied to the companies they hold.

Liquidity and accessibility

Gold ETFs generally offer greater liquidity, since you can buy and sell shares through a brokerage account during market hours. This makes it easier to adjust your investment or access cash without arranging a physical sale.

Physical gold may take longer to sell, but many precious metals dealers offer buyback programs that simplify the process. Widely recognized gold coins and bars can also be easier to resell than less common products.

However, buyback prices vary, and you may need to compare offers, arrange shipping or wait for the dealer to authenticate your gold before receiving payment. If quick access to cash is a priority, gold ETFs generally have the advantage.

Tax benefits and implications

Physical gold and many physically backed gold ETFs are subject to similar federal tax rules, so choosing an ETF doesn’t necessarily mean getting more favorable tax treatment.

“One of the biggest misconceptions is that buying gold through an ETF automatically gives you the same tax treatment as buying a stock ETF,” says Zachary Sahar, CPA, managing director at Capital Tax.

Physical gold is generally classified as a collectible for federal tax purposes, and many physically backed gold ETFs receive similar treatment. Long-term gains may be subject to a maximum federal tax rate of 28%, although your actual rate depends on your income and investment structure. Short-term gains are generally taxed at ordinary income rates.

“Before investing, I’d look at the fund’s structure and the after-tax return, not just the price of gold,” Sahar advises.

Holding gold investments in a tax-advantaged retirement account can change the equation. Gold ETFs held in traditional or Roth IRAs generally follow the tax rules of those accounts, rather than triggering capital gains taxes when shares are sold within the IRA. Eligible physical gold can also be held in a self-directed IRA, subject to IRS requirements for custodianship and storage.

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What about a gold IRA?

If you’re investing for retirement, a gold IRA offers another way to own physical gold while taking advantage of the tax benefits of an individual retirement account.

A gold IRA is a type of self-directed IRA that allows you to hold IRS-approved gold coins and bars. Unlike gold you purchase directly, the metal must be held by an approved custodian or trustee, rather than stored at home.

Gold IRAs can offer tax-deferred growth through a traditional IRA or potentially tax-free qualified withdrawals through a Roth IRA. However, they typically come with additional costs, including custodial, storage and transaction fees.

If you want physical gold as part of your retirement savings, a gold IRA may be worth considering. Just be sure to compare providers, fees and investment requirements before opening an account.

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Which is better for you: Gold ETFs or physical gold?

The better investment depends on what you want gold to do for your portfolio. Gold ETFs offer convenience, flexibility and easy access to the market, while physical gold appeals to investors who value tangible assets and direct ownership.

Here’s how the two options compare based on your investment priorities.

You don’t necessarily have to choose one over the other. Some investors hold both physical gold and gold ETFs to combine the benefits of direct ownership with the convenience and liquidity of exchange-traded investments.

Bottom line: Gold ETFs vs. physical gold

Gold ETFs are generally the simpler, more affordable way to invest in gold, particularly if you’re starting with a smaller amount or want the flexibility to buy and sell shares through a brokerage account.

Physical gold offers something ETFs can’t: direct ownership of a tangible asset. For investors who value having control over their gold outside traditional financial accounts, the added costs of purchasing, storing and selling bullion may be worthwhile.

Neither investment is right for everyone, and you don’t necessarily have to choose just one. Consider your budget, investment timeline, comfort with the costs and risks, and how gold fits into your broader financial goals before deciding which approach works best for you.

FAQs

Are gold ETFs backed by real gold?

Many gold ETFs are backed by actual physical gold. However, some funds use futures contracts to track gold prices, while others invest in gold mining companies rather than the metal itself.

Is physical gold safer than a gold ETF?

The answer depends on which risks you’re most concerned about. With physical gold, you’re responsible for keeping it safe from theft or loss. Gold ETFs take that responsibility off your hands, but you’re relying on the fund and its service providers. Either way, you can still lose money if gold prices fall.

Can you convert gold ETF shares into physical gold?

You generally can’t convert gold ETF shares into the real thing. While some funds allow large institutional investors to redeem shares for gold, individual investors typically need to sell their shares and use the proceeds to purchase coins or bars.

Do gold ETFs and physical gold have the same returns?

Not necessarily. While both generally track the price of gold, your actual returns depend on the costs of buying, holding and selling your investment. Gold ETFs charge fund expenses and may have trading costs, while physical gold typically comes with dealer premiums and potential storage and insurance expenses. These differences can affect how much you ultimately earn, even when gold prices rise.

This article originally appeared on Money Group Affiliate: Gold ETF vs. physical gold: Which investment is better for you?

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