0121 634 8060 7am-10pm, 7 days a week Free Insured Next Day Delivery

Gold ETF

A gold ETF is a way of trading gold on the stock exchange. Buying physical gold is, in our opinion, the best way to invest in gold. It is not the only way, however – some investors choose unallocated gold, or Exchange-Traded Funds (ETFs).

An ETF is a type of security – a fund that can be traded on the stock exchange. An ETF may contain assets such as stocks, bonds, index funds, or commodities. A gold ETF sells shares in a fund made up of gold bullion assets.

A gold ETF allows an individual to invest in gold bullion quickly, as delivery and ownership of gold never actually happens. This is generally done by people who want to trade gold as a speculative investment, but this counters one of gold's key appeals; it is a long-term, safe haven investment. Although prices can move quickly, it is an asset intended to be kept during years of economic turmoil, not something typically to be bought and sold within hours or days of purchase.

A gold ETF is then typically bought by large-scale investment companies, though the rise of the internet and more open trading platforms does allow individual investors to trade in these ETF's should they wish to.

The most famous Gold ETF is the 'GLD'. The GLD is the ticker symbol for the SPDR Gold Shares ETF. A ticker symbol is an abbreviation for a stock or commodity traded on a stock exchange or an index used on the exchange. It is derived from the time when stock information was carried on telegraph ticker machines.

The Standard & Poor building in New York, home to one of the world most famous gold ETFs.

Standard & Poor Headquarters, 55 Water Street, New York.

SPDR is Standard & Poor's Depository Receipts or SPDR Gold Trust. It was founded in November 2004, and its ETF is traded on the New York Stock Exchange Arca (NYSE Arca).

The SPDR Gold Shares ETF or GLD, like other gold ETFs, is designed to track the price of gold. GLD investors own shares in the fund’s 839 tonnes of gold bullion. The shares in the GLD are valued at the price of one-tenth (1/10) of an ounce of gold per share.

ETFs vs Physical Gold

A gold ETF share, backed by physical gold, will fluctuate in line with the gold spot price. As such, an investor can make money when the gold price rises, and lose money when it falls, in the same way that anyone who owns physical gold can.

Gold Exchange-Traded Funds can appear to be a cost-effective substitute for physical bullion. The truth however is that while these funds are supported by gold bullion, a gold ETF isn’t a contractual entitlement to any physical gold. An ETF shareholder effectively owns a debt that is supported by the fund’s bullion assets. They are not the rightful owner of any specific piece of gold.

Graphic representation of a gold ETF.

Gold Exchange Trade Funds are traded on the commodities markets, and like other stocks are subject to counterparty risk.

It is likely that the value of ETF shares issued is far greater than the value of gold the funds physically own. The ETF shares are therefore not supported by an equivalent amount of physical gold. In the event that the bank or institution issuing the ETF becomes insolvent, then it is very unlikely that its share owners would be able to recoup their investment.

Investors who have bought and sold ETF shares do save the costs of premiums, insurance and storage. However, in return they must pay management fees, lose total ownership of their investment, and have to put complete trust in the fund’s management.

There is a risk that your ETF management will fail to fulfil their promises. This is not to say the ETF mangers will deliberately renege on their duty but, as regulation on ETFs are not as strict as on other institutions, this is a possibility. Realistically, this mismanagement could come from poor market decisions and unforeseen circumstances.

ETF fund administrators issue and withdraw shares to maintain parity with gold. Should this mechanism fail, the funds would have insufficient access to physical amounts of gold to maintain their obligations, and the effects this could have are severe.

Gold exchange-traded funds have also faced criticism for their complexity and lack of transparency. The GLD was, for several years, the second largest exchange-traded fund on the planet but it is no longer even in the top 10 - an indicator that investors look more favourably on owning physical gold.

Why you should invest in physical gold rather than ETFs

There are many reasons why physical gold and silver may be a better investment than an ETF. Despite the cost of storage and insurance, the actual expense ratio of buying gold or an ETF is very similar.

Physical gold bullion in hands.

Unlike ETF shares, physical gold is an investment you hold. There is no counterparty risk.

Many investors choose gold as a safe haven for times of financial crisis and as a hedge to counterbalance other investments. ETFs, though, are traded like other stocks and shares on the derivatives markets, and as such are part of the very financial system gold is intended to protect from. You must then ask yourself if they fulfil the primary purposes for owning gold.

Physical gold often offers tax benefits, with investment gold being VAT-free, and UK gold coins are also exempt from Capital Gains Tax. The money earned from a gold ETF is, however, treated as normal income, and taxed as such. This means the premium paid for physical gold can quickly outweigh potential CGT paid on the profit from an ETF if the price rises.

In contrast to forms of paper gold, physical gold bullion is yours and does not rely on any bank, government or brokerage firm. You can buy, store, and sell it wherever, and whenever you want to.

  • Gold ETF shares are not gold
  • Gold ETF shares involve counterparty risk
  • Physical gold is totally yours to hold and own
  • Physical gold historically has stood the test of time