Gold has long been considered a safe-haven asset, attracting investors seeking to diversify their portfolios and hedge against economic uncertainty. In recent years, gold exchange-traded funds (ETFs) have gained popularity as a convenient way to invest in gold without the hassle of storing physical bullion. However, not all gold ETFs are created equal. Below, the experts from First National Bullion, San Diego residents’ best choice when they need advice about investing in gold, silver, platinum, and palladium, explore the world of gold ETFs backed by physical bullion, helping you understand their benefits, risks, and key differences.

Gold ETFs Backed by Bullion

Gold ETFs backed by bullion are investment funds that hold physical gold as their underlying asset. These ETFs aim to track the price of gold closely, providing investors with exposure to the precious metal without the need to purchase, store, or insure physical gold themselves. Each share of a gold ETF represents a specific amount of gold, typically measured in ounces or fractions thereof.

Advantages of Bullion-Backed Gold ETFs

Convenience & Liquidity

One of the primary advantages of bullion-backed gold ETFs is their convenience. Investors can buy and sell shares of these ETFs through their brokerage accounts, just like stocks. This provides a high degree of liquidity, allowing investors to easily adjust their gold exposure without the logistical challenges associated with physical gold ownership.

Lower Costs

Compared to buying and storing physical gold, bullion-backed ETFs often have lower overall costs. Investors don’t need to worry about storage fees, insurance, or transportation costs associated with owning physical gold. Additionally, the expense ratios of many gold ETFs are relatively low, making them a cost-effective way to invest in gold.

Transparency & Security

Reputable gold ETFs backed by bullion provide transparency regarding their holdings. They regularly publish information about the amount and quality of gold they hold, often subjected to third-party audits. The physical gold is typically stored in secure vaults, providing investors with peace of mind regarding the safety of their investments.

Top Gold ETFs Backed by Physical Bullion

Let’s examine some of the most popular gold ETFs backed by physical bullion.

SPDR Gold Shares (GLD)

SPDR Gold Shares is one of the largest and most liquid gold ETFs in the market. Launched in 2004, it holds physical gold bullion in secure vaults. Each share of GLD represents approximately 1/10th of an ounce of gold. With its high trading volume and tight bid-ask spreads, GLD is a popular choice for both institutional and retail investors.

iShares Gold Trust (IAU)

The iShares Gold Trust is another well-established gold ETF backed by physical bullion. It offers a lower expense ratio compared to GLD, making it attractive for cost-conscious investors. Each share of IAU represents approximately 1/100th of an ounce of gold, allowing for smaller investment increments.

Aberdeen Standard Physical Gold Shares ETF (SGOL)

SGOL is a physically backed gold ETF that stores its gold in secure vaults in Switzerland. This ETF appeals to investors who prefer gold storage outside the United States. SGOL offers competitive expense ratios and provides detailed information about its gold holdings, including bar lists.

Perth Mint Physical Gold ETF (AAAU)

The Perth Mint Physical Gold ETF is unique in that it’s backed by gold stored at the Perth Mint, a sovereign entity of the government of Western Australia. This provides an additional layer of security, as the gold is guaranteed by the government. AAAU also offers investors the option to redeem their shares for physical gold, subject to certain conditions.

VanEck Merk Gold Trust (OUNZ)

OUNZ is another gold ETF that allows investors to redeem their shares for physical gold. This feature appeals to investors who want the option to take physical delivery of gold in the future. OUNZ stores its gold in secure vaults in London and has a competitive expense ratio.

Considerations when Choosing a Gold ETF

When selecting a gold ETF backed by bullion, consider the following factors.

Expense Ratio

Expense ratios are a critical factor when choosing an ETF. Physically backed gold ETFs typically have higher expense ratios compared to their futures-backed counterparts due to storage and insurance costs. Compare the expense ratios of different ETFs, as these ongoing costs can impact your returns over time. Lower expense ratios generally mean more of your investment goes toward gold exposure.

Tracking Error

Look at how closely the ETF tracks the price of gold. A lower tracking error indicates the ETF more accurately reflects gold’s price movements.

Liquidity

Liquidity is essential for investors who may need to quickly buy or sell shares. Consider the trading volume and bid-ask spreads of the ETF. Higher liquidity generally means easier buying and selling with minimal price impact.

Storage Location

The geographical location of gold storage can influence an investor’s decision. Some investors prefer gold stored in specific locations or jurisdictions. Review the storage arrangements of each ETF to ensure they align with your preferences.

Redemption Options

If the ability to redeem shares for physical gold is important to you, focus on ETFs that offer this feature, such as AAAU and OUNZ.

Risks & Limitations of Gold ETFs

While gold ETFs offer many advantages, it’s essential to understand their risks and limitations.

Market Risk

The price of gold can be volatile, and gold ETFs are subject to the same market risks as physical gold. Factors such as economic conditions, currency fluctuations, and geopolitical events can impact gold prices.

Counterparty Risk

Although gold ETFs are backed by physical bullion, there’s still a small counterparty risk associated with the fund’s structure and the custodian holding the gold.

No Physical Possession

Most gold ETFs don’t allow for the physical delivery of gold (with some exceptions). If owning tangible gold is important to you, traditional bullion ownership might be more suitable.

Potential Tracking Error

While generally minimal, there can be slight discrepancies between the ETF’s performance and the actual price of gold due to factors like management fees and trading costs.

Gold ETFs backed by physical bullion offer investors a convenient and cost-effective way to gain exposure to gold. They provide the benefits of gold ownership without the logistical challenges of storing and securing physical gold. By understanding the features, advantages, and limitations of different gold ETFs, investors can make informed decisions that align with their investment goals and risk tolerance.

Whether you choose SPDR Gold Shares, iShares Gold Trust, or one of the other options discussed, bullion-backed gold ETFs can play a valuable role in portfolio diversification and wealth preservation. As with any investment, it’s crucial to conduct thorough research and consider consulting with a financial advisor before making significant investment decisions.

If you decide to purchase precious metals in physical form, make sure to work with experienced trustworthy professionals. Whether you’re looking to buy silver coins, platinum bars, or San Diego gold and bullion, you can trust the reputable dealers at First National Bullion. We’re a boutique precious metals firm with highly experienced professionals. If you’re looking to add precious metals to your collection, call us today.

The statements made in this blog are opinions, and past performance is not indicative of future returns. Precious metals, like all investments, carry risk. Precious metals and coins may appreciate, depreciate, or stay the same in cash value depending on a variety of factors. First National Bullion does not guarantee, and its website and employees make no representation, that any metals for sale will appreciate sufficiently to earn the customers a profit. The decision to buy, sell, or borrow precious metals and which precious metals to purchase, borrow, or sell are made at the customer’s sole discretion.