How Gold ETFs Work
Physically-backed gold ETFs hold allocated gold bars in secure vaults and issue shares that represent fractional ownership of that gold. The mechanism is straightforward: the fund buys gold, stores it, and each share tracks a specific fraction of an ounce.
The creation/redemption process maintains the price link between shares and physical gold. Authorized participants (large financial institutions) can create new ETF shares by delivering gold to the fund’s custodian, or redeem shares by withdrawing gold. This arbitrage mechanism keeps the ETF’s market price close to its net asset value (NAV). When shares trade above NAV, authorized participants create new shares (buying gold, delivering it to the trust, receiving shares to sell). When shares trade below NAV, they redeem shares (buying cheap shares, exchanging for gold, selling the gold). The spread between market price and NAV rarely exceeds 0.5%.
Individual investors never interact with the creation/redemption process. They buy and sell ETF shares on the stock exchange like any other security.
Major Gold ETFs Compared
| Fund | Ticker | Expense Ratio | AUM (approx.) | Gold per Share | Custodian | Vault Location |
|---|---|---|---|---|---|---|
| SPDR Gold Shares | GLD | 0.40% | $60B+ | ~0.093 oz | HSBC | London |
| iShares Gold Trust | IAU | 0.25% | $30B+ | ~0.0093 oz | JPMorgan | London, New York, Toronto |
| SPDR Gold MiniShares | GLDM | 0.10% | $8B+ | ~0.0093 oz | HSBC | London |
| Aberdeen Physical Gold | SGOL | 0.17% | $3B+ | ~0.093 oz | JPMorgan | Zurich, London |
GLD: The Original
Launched in November 2004, GLD was the first US-listed physically-backed gold ETF. It democratized gold investing by making gold accessible through a standard brokerage account. GLD’s AUM exceeds $60 billion, making it the largest gold ETF by a wide margin and one of the most heavily traded ETFs in any category.
GLD holds over 800 tonnes of gold in HSBC’s London vault, making it one of the largest gold holders in the world, larger than the gold reserves of most countries.
The 0.40% expense ratio is GLD’s primary weakness. On a $100,000 position, that is $400 per year, compounding over time. GLD was competitive when it launched, but newer funds now offer the same exposure at a fraction of the cost. GLD remains dominant in trading volume and liquidity, which matters for institutional investors and active traders who prioritize tight bid-ask spreads and deep order books.
Best for: Institutional investors, active traders, options strategies (GLD has the most liquid options market of any gold ETF).
IAU: The Mid-Range Choice
iShares Gold Trust launched in 2005 and has grown to roughly $30 billion in AUM. The 0.25% expense ratio represents a meaningful savings over GLD: $250 versus $400 annually on a $100,000 position. Over 10 years, that difference compounds to over $1,500 in saved fees.
IAU shares represent a smaller fraction of an ounce (~1/100th oz versus GLD’s ~1/10th oz), resulting in a lower share price. This makes IAU more accessible for small-dollar investments and fractional share purchasing. JPMorgan serves as custodian, with gold stored across multiple vault locations.
Best for: Buy-and-hold investors who want lower costs than GLD with strong liquidity, retirement accounts where long-term fee savings matter.
GLDM: The Cost Leader
SPDR Gold MiniShares, launched in 2018, charges just 0.10% annually. This is the lowest expense ratio among major physically-backed gold ETFs. On a $100,000 position, annual fees are $100, one-quarter of GLD’s cost.
GLDM was created by the same sponsor as GLD (State Street/World Gold Council) specifically to compete on cost. The product is identical in structure to GLD: physical gold held in HSBC’s London vault. The difference is purely in fees.
GLDM’s AUM of roughly $8 billion is smaller than GLD or IAU, but trading volume is sufficient for all but the most demanding institutional needs. Bid-ask spreads are slightly wider than GLD but negligible for retail-sized orders.
Best for: Long-term holders, cost-conscious investors, retirement accounts. GLDM is the default recommendation for buy-and-hold gold ETF exposure based purely on cost.
SGOL: Swiss Vaulting
Aberdeen Standard Physical Gold Shares ETF stores a portion of its gold in Zurich, Switzerland, in addition to London vaults. The 0.17% expense ratio is competitive, sitting between GLDM and IAU.
SGOL appeals to investors who prefer Swiss jurisdiction for gold storage, a consideration rooted in Switzerland’s political neutrality and strong property rights tradition. Practically, the jurisdiction of vault storage has not been a differentiating factor in ETF performance or investor outcomes. But for those who view London-vaulted gold as carrying UK jurisdictional risk, SGOL offers an alternative.
Best for: Investors who prioritize Swiss vaulting, those seeking an alternative custodian to HSBC or JPMorgan.
Physical vs Synthetic ETFs
All four funds above are physically backed: they own real gold bars. Some gold products use derivatives (futures contracts, swaps) to replicate gold exposure without holding physical metal. These synthetic products carry counterparty risk because their value depends on the financial health of the swap counterparty.
For gold ETFs, physically-backed funds are the standard and the strong preference. The counterparty risk of synthetic gold products undermines the purpose of owning gold as a counterparty-free asset. Unless there is a specific tactical reason to use a synthetic product (and there rarely is for individual investors), stick with physically-backed funds.
Tax Treatment
Gold ETFs are classified as collectibles by the IRS. This carries a significant tax consequence: long-term capital gains on gold ETFs are taxed at a maximum rate of 28%, compared to the 20% maximum rate for stocks and conventional ETFs.
This 8-percentage-point tax penalty applies to gains held for more than one year. Short-term gains (held less than one year) are taxed as ordinary income for both gold ETFs and stocks.
Example: $10,000 gain on GLD held for two years, at the highest tax bracket. Tax owed: $2,800 (28% collectibles rate). The same $10,000 gain on a stock ETF: $2,000 (20% long-term rate). The $800 difference is material.
Tax-advantaged accounts (IRA, 401k) eliminate this issue entirely, since gains within these accounts are not taxed until withdrawal (traditional) or are tax-free (Roth). Gold ETFs in a Roth IRA face no collectibles tax penalty on gains.
Gold mining stocks and mining ETFs (GDX, GDXJ) are taxed as regular equities, not collectibles. This is a meaningful advantage for taxable accounts.
Gold ETFs vs Physical Gold
| Factor | Gold ETFs | Physical Gold |
|---|---|---|
| Annual cost | 0.10-0.40% expense ratio | 0.5-1.0% storage (if depository) or safe cost |
| Transaction cost | ~$0 brokerage commission | 2-8% premium on buy, 0-3% spread on sell |
| Liquidity | Instant, market hours | 1-5 business days to sell through dealer |
| Counterparty risk | Fund custodian, authorized participants | None (direct ownership) |
| Tax rate (long-term) | 28% max (collectibles) | 28% max (collectibles) |
| Minimum investment | ~$25 (one GLDM share) | ~$250 (1 gram bar) to ~$2,500 (1 oz coin) |
| IRA access | Any IRA or 401k, no special custodian | Self-directed IRA only, depository required |
| Physical possession | No | Yes |
The break-even analysis between ETFs and physical gold depends on holding period. A 1 oz gold bar at a 3% premium with no annual storage costs (home safe, already owned) becomes cheaper than GLDM (0.10%/year) after 30 years of holding. Against GLD (0.40%/year), the break-even is roughly 7-8 years.
If using depository storage at 0.5% annually, physical gold’s total annual cost exceeds most ETFs, and the break-even never arrives. Physical gold’s advantage in this comparison is the absence of counterparty risk, not cost.
For most investors, the practical recommendation: ETFs for tactical allocations, retirement accounts, and positions under $10,000. Physical gold for core long-term holdings, positions above $25,000, and those who prioritize direct ownership. Both can coexist in a diversified gold allocation. See our gold investing guide for allocation frameworks.
Tracking Error
Gold ETFs aim to track the gold spot price minus their expense ratio. In practice, small deviations (tracking error) occur due to the timing of gold valuation, trading spreads, and the mechanics of share creation/redemption.
For the major funds, tracking error is minimal: typically less than 0.1% per year above the expense ratio. GLD and IAU track gold prices with high fidelity. Smaller or newer funds may exhibit slightly larger tracking error due to lower liquidity and less efficient arbitrage.
Over long holding periods, the primary drag on returns is the expense ratio, not tracking error. This reinforces the importance of choosing the lowest-cost fund for buy-and-hold positions.
Counterparty Risk Considerations
Physically-backed gold ETFs involve multiple counterparties: the fund sponsor, the trustee, the custodian (who holds the gold), and the authorized participants. While the gold is held in allocated form (specific bars assigned to the fund), the investor’s claim is on the fund’s shares, not directly on the gold.
In the extremely unlikely event of custodian failure (HSBC, JPMorgan), the gold is held in segregated allocated accounts and should be protected from the custodian’s creditors. However, the legal architecture has never been stress-tested in a major custodian bankruptcy.
For investors who view this counterparty chain as a concern, physical gold in direct possession or at a depository in the investor’s own name eliminates all intermediaries. The premium paid for physical gold is, in part, the cost of removing these counterparties.
For most investors, the counterparty risk of major gold ETFs is theoretical rather than practical. The funds are audited, the gold is verified, and the custodians are systemically important financial institutions. The risk exists but is extremely low probability.
Frequently Asked Questions
What is the best gold ETF to buy?
GLDM offers the lowest expense ratio (0.10%) among major physically-backed gold ETFs, making it the most cost-efficient choice for buy-and-hold investors. GLD offers the deepest liquidity and most active options market, making it better for traders and institutional investors. IAU sits in the middle with a balance of reasonable cost (0.25%) and strong liquidity.
Do gold ETFs actually hold physical gold?
The major funds (GLD, IAU, GLDM, SGOL) hold allocated physical gold bars in secure vaults. The gold is audited regularly, and bar lists are published. GLD and GLDM hold gold at HSBC’s London vault. IAU holds gold at JPMorgan facilities. SGOL holds gold in Zurich and London. Investors can review the complete bar lists on each fund’s website.
Can I take delivery of gold from a gold ETF?
Individual retail investors cannot redeem ETF shares for physical gold. Only authorized participants (large institutions) can create and redeem shares through the in-kind process. Individual investors must sell their shares on the exchange and use the proceeds to purchase physical gold separately if desired.
Are gold ETFs taxed differently than gold coins?
Both are taxed at the 28% maximum collectibles rate for long-term capital gains. The tax treatment is identical. The difference is in transaction costs and convenience, not tax rates. Holding gold ETFs in tax-advantaged accounts (IRA, 401k, Roth IRA) eliminates the collectibles tax issue for both.
How much gold does GLD hold?
GLD holds over 800 tonnes of physical gold, valued at more than $60 billion. This makes it one of the largest gold holders in the world. Holdings fluctuate daily as authorized participants create or redeem shares in response to investor demand. Daily holdings data is published on the SPDR Gold Shares website and through major financial data providers.