Investing in Physical Gold vs ETF: Pros and Cons
Gold remains a popular investment prospect, much as it has for centuries. The commodity is so popular, in fact, that there’s now a way to invest in gold without owning any – and that’s via an ETF.
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ETFs, or exchange-traded funds, present a way to invest in gold through a stock market, much like you would with shares in a company. You don’t physically own any gold but can benefit from its robust value profile and tendency to stay put amid volatile trading conditions.
The question is: should you buy into gold ETFs, or is it still better to own the real deal? That’s just one question we hope to answer in this guide, which covers everything you need to know about the physical gold vs ETF debate. Whilst we are passionate about gold, we’re not involved in investments, so you can rest assured the information here is completely impartial.
By the end of this guide, you’ll know…
What is an ETF and How Does it Work?
An exchange-traded fund is a mutual fund that lets investors buy into gold through a stock exchange. Rather than owning physical gold, you instead own shares in a fund, with values tracking against gold’s real-world price.
Every unit of gold ETF equates to one gram of physical gold. It is, however, rare for investors to redeem their ETFs for the real thing, since many asset management companies simply don’t allow it.
An ETF is a dematerialized way of benefitting from gold’s strong value profile without the maintenance, storage and security costs that come with actually owning the precious metal. Remember, gold is often used as a hedging tool against inflation and declining currencies, so a gold ETF is a flexible way to harness these benefits without buying the real deal.
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What Are the Pros and Cons of Investing in Gold ETFs?
Now that we’ve covered what ETFs are, it’s time to focus on their pros and cons. That way, you can decide if physical gold or ETFs are the right investment option for you.
The Pros
Fluid and flexible– owning physical gold is a hands-on investment, and this can make it more difficult to sell, trade and transport. In contrast, gold ETFs are as fluid and flexible as any other type of stock, meaning you can buy and sell with minimal overheads or administrative requirements.
Minimal administrative overheads – this brings us neatly to our next point, which relates to the low cost of owning ETFs compared to physical gold. Storing, securing, transporting, and handling gold all costs money, so you need to factor this into your investment decision. By contrast, ETFs have fewer expenses attached.
Comparable return for reduced risk – gold ETFs generally fetch the same return as physical gold, since they track real-time gold values. That means you can enjoy comparable fiscal performance without worrying about your gold being stolen, lost or misplaced, things that, though rare, can happen if you opt for the physical route.
Minimal disparity in value – because gold is a physical commodity, its condition matters, and there may be some disparity in per-ounce price depending on the bank or vendor in question. For ETFs, this is less of a problem since what you’re selling or trading is purely part of a mutual fund, and will be treated in the same way as shares or stocks.
Small denominations – one of the best things about gold ETFs is that they can be bought in small denominations, down to one unit (which equates to one gram of gold). This makes them an excellent starting point for new investors who are looking to diversify their growing portfolio without buying a lot of expensive physical gold.
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The Cons
Can’t be redeemed for physical gold – despite what you might think, gold ETFs can’t be redeemed for physical gold. They can, however, be exchanged for cash, but this defeats the purpose of buying an ETF in the first place (since they’re viewed as a good way to safeguard against downturns in standard fiat currencies).
ETF trading costs can add up if you’re buying and selling regularly – although the cost of gold ETFs is smaller than the logistics-related overheads of owning physical gold, there are a few add-on expenses you need to factor in. For starters, you’ll lose a percentage of the total ETF value each year to the fund’s expense ratio, which is an annual charge to cover admin and management. You’ll also pay commission each time you sell, as well as a broker fee (though some ETF brokers are now offering fee-free services).
Huge choice of ETF products – since gold ETFs emerged, dozens of products have followed suit, and this can make it difficult to choose the service that’s right for you. With a lot to weigh up, inexperienced investors may become overwhelmed by the options available.
Exposed to risk like any other stocks or shares – let’s be clear: gold ETFs are riskier than physical gold since they’re traded on derivative markets, and a part of the financial system that physical gold safeguards against. If you’re willing to accept this risk, however, then they may prove a more viable and flexible alternative.
What Are the Pros and Cons of Investing in Physical Gold?
The advantages and disadvantages of investing in physical gold are well-publicized, so we won’t include a full list here. We will, however, focus on the pros and cons of the precious metal in how it compares to its modern counterpart, the ETF.
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The Pros
Physical gold carries far fewer risks than ETFs – there’s something reassuring about knowing you have physical gold locked away in a vault, as opposed to intangible assets floating in the ether and exposed to external threats and risks. Physical gold will always be one of the safest and most reliable commodity assets money can buy.
Physical gold provides financial reassurance – physical gold has long been used as a way to shield investors from rocky economic conditions; in fact, it’s something it excels at. You don’t get the same fallback qualities with ETFs, which are more vulnerable to creaks in the market.
Complete control over when to sell – because the value of ETFs can fluctuate much more broadly than physical gold, investors may be more likely to sell at inopportune moments. With physical gold, whose value remains relatively flat, there’s a much greater sense of control when it comes to selling or trading, and less pressure on your decision.
The Cons
Expensive administrative costs – as touched on above, physical gold can be expensive to store, transport and keep secure, so this is certainly something to factor into your decision.
Slower to move, sell or trade – selling or trading physical gold requires a lot of work, which can be difficult and expensive to manage, particularly for new or inexperienced investors.
Minimal returns – gold is a safe commodity asset, but you shouldn’t expect high returns on your investment. Instead, treat it as a buffer against economic shock, and consider this when weighing up your cost to risk ratio.
Glint offers you a chance to own and spend real, physical gold. Your gold is stored in a secure vault in Switzerland, and using Glint’s technology can be spent in stores around the world. You can use your gold to buy almost anything, from something so small as a coffee.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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