Gold ETFs vs. physical gold: costs, risks and taxes compared

What a gold ETF actually holds

Take SPDR Gold Shares (GLD), the oldest and largest U.S. gold ETF. The fund owns gold bars of at least 99.5% purity, held for it by two custodian banks, JPMorgan Chase and HSBC, in vaults in London, New York and Zurich. Its shares trade on the stock exchange all day like any stock.

Large trading firms, called authorized participants, can swap big blocks of shares for gold and back again. That keeps the share price close to the value of the gold behind it. Individual investors generally can’t do the same. GLD says an investor who wants to exchange shares for physical gold would have to make arrangements through their broker.

The fund earns no income and sells a little gold regularly to pay its expenses, so each share represents slightly less gold as the years go by.

Fund	Annual expense ratio	Assets	Launched
SPDR Gold Shares (GLD)	0.40%	About $152 billion	2004
iShares Gold Trust (IAU)	0.25%	About $73 billion	2005

Costs compared

On a $10,000 holding, an ETF charging 0.25% costs about $25 a year and one charging 0.40% about $40, and you pay a small brokerage spread when you trade.

Physical gold costs more up front and on the way out. You pay the dealer’s premium over spot when you buy, the dealer pays you less than it charges when you sell, and you need storage and insurance in between. A home safe plus an insurance rider, or a depository’s annual fee, can easily cost more each year than an ETF’s fee. In a gold IRA, custodian and storage fees for an account under $15,000 come to about $215 to $335 a year at the two custodians in our gold IRA fees guide, before any charges for buying, selling, shipping or closing the account.

The risks of gold ETFs

• Price risk. A gold ETF falls when gold falls. Its value follows the gold price minus the fund’s expenses, and on any given day the share price can be a little above or below the value of the gold behind it.
• You own shares, not bars. Your claim depends on the fund, its custodian banks and the rules they operate under. Large funds publish lists of their bars and are audited, which reduces this risk without removing it.
• No easy delivery. You can’t usually turn your shares into coins or bars.
• Market hours. You can only trade when the exchange is open, and a sharp move overnight or over a weekend shows up in the next opening price.
• A slowly shrinking ounce. Fees are paid by selling gold, so the gold per share declines a little every year.

The risks of physical gold

• Theft and loss. Metal at home can be stolen or lost, and standard homeowners policies often cover very little of it.
• Higher trading costs. Premiums and spreads can take several percent of your money on a round trip, and much more for collector coins.
• Fakes. Buying from unfamiliar sellers risks counterfeits.
• Selling takes effort. You have to find a buyer, get quotes and deliver the metal.

In exchange, you own the metal outright, can hold it outside the banking system, and don’t depend on any fund’s operations.

Taxes

Outside a retirement account, the IRS treats gains on physical gold as gains on collectibles, taxed at up to 28% if held more than a year. Gold ETFs that hold bullion are taxed the same way: GLD’s own guidance says long-term gains on gold bullion are taxed at a maximum 28% rate. That’s higher than the 20% top rate on most stocks and stock funds. Inside an IRA or 401(k), the usual retirement-account rules apply instead.

Funds like GLD are grantor trusts, so for tax purposes you’re treated as owning a share of the gold itself. When the fund sells a small amount of gold to pay its expenses, you have a small gain or loss on that gold, even in a year when you don’t sell any shares. Brokers aren’t required to report these sales on Form 1099-B, so GLD posts an example on its website showing how to work out the figures.

Gold ETFs in a retirement account

Most brokerages let you hold gold ETFs in an ordinary IRA, with no special custodian or storage arrangement. For many people who want gold in a retirement account, that’s far cheaper than a self-directed gold IRA. Some 401(k) plans offer a gold or commodities fund too.

Which should you choose?

A gold ETF suits you if you want gold’s price movements at low cost, with easy buying and selling in an account you already have. Physical gold suits you if you want metal you control, outside the financial system, and accept the extra cost and effort. Plenty of people do both: a small amount of physical gold for peace of mind and an ETF for the rest. Ways to invest in gold covers the other options, including mining stocks.

Frequently asked questions