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Investing in a Gold ETF – Advantages & Disadvantages

Investing in gold can be easily done through an ETF. But we need to be aware of what that means.  We discuss the advantages and disadvantages of investing our money in a gold ETF.


Introduction to Gold ETF

An ETF is an exchange-traded fund that allows us to invest in certain types of assets. There are many types of ETFs: stocks, bonds, and also precious metals.

Thus, a gold ETF is managed by an asset management company or a bank. They keep physical gold in a vault and issue ETF shares that allow investors in buy a portion of that gold. In return, they charge investors an annual management fee.

There are exchange-traded funds that hold other precious metals, such as silver, palladium, platinum and even rhodium.

To determine if it is convenient for us to invest in gold through an ETF, it is important to know what advantages and disadvantages these funds have relative to buying physical metal.

If you want to know why we should invest in gold, regardless of whether we do it through an ETF or directly buying physical gold, check out the following information:
Top 8 Reasons Why You Should Invest in Gold

Advantages of investing in a Gold ETF

Let us start our analysis by looking at the advantages that a gold ETF offer us if we want to invest in the yellow metal:


The main advantage of investing in a gold ETF is convenience. And convenience can be defined in various different ways.

Many investors are overwhelmed by the idea of investing in physical gold. First of all, they would have to look for a reputable precious metals dealer and choose what to buy. Once they own the gold, they would have to decide whether they keep it themselves or they deposit it in a safe place.

On the other hand, investing in gold by buying an ETF is much simpler and more transparent. It saves us a lot of effort and headaches. It is as easy as opening our online broker, finding the gold ETF we want to buy and placing an order. This is as convenient as it gets.

Buy at spot price

The spot price of gold is the official price at which the precious metal is quoted on the financial markets. It is the price we will find if we look for it online or follow the financial press. And it is also the price we would receive if we wanted to sell physical gold.

However, the purchase of physical gold does not take place at the spot price. That would be the price for very large physical purchases.

The purchase price for most investors is usually slightly higher, around 4-6% above spot, depending on whether we buy coins or bars, how many of them, the dealer we buy from and how much inventory there is in the market.

In contrast, a gold ETF allows us to invest in gold and pay almost spot prices. ETFs, like any other publicly traded investment product, have a bid-ask spread. This simply means we buy at slightly higher prices than we sell.

Nevertheless, the bid-ask spread for most gold ETFs hovers around 0.5% or less.  That makes buying and selling gold through an ETF much cheaper.  Especially if we are considering getting in and out on a frequent basis.

Low costs

Another advantage of investing in gold through an ETF is the low cost of doing so. Fees are very moderate.

The annual management fee of a precious metals ETF varies depending on which one we select. However, they tend to be somewhere between 0.15-0.5% of the value of our investment. A very reasonable fee for the service and convenience they offer.


Liquidity is the ability to sell our assets quickly and without tanking the price. In that sense, both gold ETFs and physical gold are very liquid. We can sell pretty much at any time. And, since there are so many buyers and sellers in the gold market, we can trade large quantities without affecting its price.

But selling an ETF is much more convenient than selling physical gold since we can do it without leaving our home or making a shipment. It is as simple as entering a market order when the exchange is open. 

Disadvantages of investing in a Gold ETF

Investing in gold through an ETF has advantages, as we have just seen, but it also has its disadvantages:

Counterparty risk

The first drawback of investing in gold through an ETF is that our investment is still within the financial system, and hence exposed to counterparty risk. This means this type of gold investment loses one of the most important features of owning physical gold: being out of the financial system.

Physical gold is one of the few assets that is not simultaneously someone else’s liability. If you hold gold in your hand, no one owes you anything. However, your gold ETF shares are still someone’s liability. In this case, our assets are the liabilities of the company in charge of the fund.

The reason this may be dangerous is that, in extreme situations, we do not know what that company would be able to do with the gold it keeps. Governments would potentially take actions against our interests.

Therefore, investing in gold through an ETF is great when it comes to benefitting from increases in the price of gold and add diversification to the portfolio. But it is not ideal if we believe that there can be a total collapse of the financial or monetary system.

After all, most gold ETFs indicate in their prospectus that, in extreme cases, the company could close out the fund and pay us in fiat currency.

A Gold ETF may not be fully backed by physical gold

The other disadvantage of investing in a gold ETF is that, while most of those fund managers do hold the gold they claim they hold, that may not be true for all of them.

Most gold ETF prospectuses do state that part of their gold may be in vaults not controlled directly by the fund manager. This adds another layer of risk.

At the same time, because gold ETF shares are extremely liquid, it is impossible for gold ETF managers to always have the exact amount of gold they should own. This is especially true if more people want to invest in a gold ETF and new shares have been issued.

Because the purchase of large amounts of physical gold is not an immediate thing, it is normal for a gold ETF manager to use derivative contracts to increase the investment in gold. This means that part of the fund may not be in physical gold, but in derivative contracts that entitle us to receive physical gold.

In cases of extreme gold scarcity, those contracts could end being settled in fiat currency instead of physical gold. This may be especially negative if the value of our national currency is collapsing.

As you can see, this risk comes down to the same potential issue: if there really are serious problems in the financial system and people rush into gold, we may not be able to get that gold.

Obviously, if you find a gold ETF that states they keep all their exposure to gold in derivative contracts and no physical gold, I would stay away from it.

Examples of Gold ETFs

These are just three of the many gold ETF funds that claim to have almost all their gold in physical metal in a vault. I am not making a recommendation, but you can check out if they are available to buy with your broker:

  • Invesco Physical Gold ETF (ISIN IE00B579F325) is a gold fund issued by Invesco, holding all of its gold in vaults in London. More information available here.
  • ZKB Gold ETF (ISIN CH0047533523) is a gold ETF issued by the Swiss bank Zürcher Kantonalbank, based out of Zurich, and claiming to have all its gold in vaults in Switzerland. More information available here.
  • Xetra Gold ETF (ISIN DE000A0S9GB0) is a gold ETF issued by Xetra, the company that owns the Frankfurt Stock Exchange. They claim to have all their gold in vaults in Germany. More information available here.


I hope you found this analysis of the advantages and disadvantages of investing in gold using an ETF useful. Having gold in your portfolio is usually a good idea, but it is important to decide how to carry out that investment.

Remember that gold ETFs are a great way to benefit from price rises in the metal and enjoy greater diversification. But if we want to hedge against the risk of a total collapse of either the financial or monetary system, it is probably better to stay away from gold ETFs and buy physical bullion.

If you would like to learn more about investing in gold, check out this section:

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Published in Funds and ETF Gold

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