There are all kinds of investment vehicles for gold, but the two most popular are arguably bullion, and bullion-backed exchange traded funds (ETFs). In this post, we’ll go over the basics of how gold-backed ETFs work – and the differences between owning ETF shares vs owning physical bullion.
An ETF is a type of investment fund that works similarly to stock in public companies. In a gold ETF, shares of the fund are backed by a stockpile of physical bullion, and the fund’s share price directly correlates with gold's market performance. When the price of gold goes up, the value of the ETF's shares does too.
A common misconception is that investing in gold ETFs is just like investing in physical bullion but with extra steps. However, that’s not technically accurate. Most ETFs were never intended to work as a substitute for physical gold ownership. Investors own shares in the fund – the fund and its administrators own the bullion. So, you can’t access the gold your shares represent. A small number of gold ETFs allow investors to take delivery of physical bullion in exchange for shares, but only if the investor meets certain requirements – such as owning a minimum number of shares or paying additional fees. This investment structure also exposes ETFs shares to different risks that don’t apply to direct ownership of physical gold, like custodial fraud, fund mismanagement, or bank system failures.
None of this is to say bullion-backed ETFs are bad – they just work differently than physical bullion. Depending on the investor, gold ETFs can be a low-cost way to invest in the direction of the gold market that’s more convenient to own and acquire than bullion. It all depends on the circumstances and goals of individual investors.