ETFs Holding Physical Gold

A common misconception is that gold ETFs must physically hold gold. This is not the case; many ETFs don’t actually hold gold but through a variety of financial instruments still manages to track gold prices. Having said that, it is possible to find ETFs that hold physical gold thought they typically come at a primium.

Using an ETF gold bullion fund is probably the most convenient way to invest in physical gold, but it is not without its drawbacks. One such drawback is the fact that holding and transporting large quantities of gold bullion is expensive, which typically results in these type of ETFs having much higher expense ratios than others.

ETFs Using Gold Futures

A way to eliminate the need for holding physical gold and thus sparing the expense of large vaults, is through the use of gold futures contracts. A gold ETF using futures has more flexibility in investing. They can for example bet on a decline in the gold price with such funds known as short gold ETFs. Sometimes ETFs holding futures contracts are actively managed, meaning they actually try to beat the return on the gold price while others simply replicate the return on gold prices.

Trading in futures is a complex process. While an ETF holding physical gold is bound to track the spot price of gold quite closely, the same can not necessarily be said for ETFs using futures, as their gold futures contracts can deviate from the spot price.

ETFs Investing in Gold Mining Companies

Since the value of gold mining companies stocks are often closely correlated with the gold price, some gold ETFs contain actual gold stocks. The main advantage to this approach, is the fact that there are no expenses tied to storing gold and that stock trading is a lot simpler than futures trading. Unfortunately however, stock prices are influenced by a host of factors and as such is not an adequate proxy of the gold price.

Most often gold ETFs use a combination of the methods listed above, therefore in reality it is not always this black and white. In the end, what type of ETF investors should buy really depends on their investment preferences and the overall goals for their portfolio.