What Is The Better Investment, Gold ETFs or Physical Bullion?

Investing in gold used to be entirely straightforward. You put down your money and got gold in your hand.

However, in this day and age, there is an entire scope of options available for you. One of those options is the gold exchange-traded fund, or gold ETF. A gold ETF allows you to buy a share in a trust that, in turn, has a store of gold under its control.

So, the obvious question is whether you should consider a gold ETF or buy gold bullion. This page is your guide to answering that question.

Key Comparison: Gold ETFs vs. Physical Gold

Investment Structure

Purchasing an ETF is easy so long as you have access to an investment broker of some kind. Engaging in an ETF investment is not much different than purchasing some shares of stock. You simply put in an order with a broker in the same manner, and you can monitor the status of your investment like you would any other regular brokerage investment.

Buying physical bullion is mostly straightforward. You approach a bullion dealer, either in person or online, and buy the amount of bullion that your budget allows.

The biggest difference between the two, though, is that buying physical bullion bears a storage and security component with it that you don’t have with buying an ETF. So, buying physical bullion is not the end of the story – you then have to find somewhere safe to keep it.

Ownership and Control

It is fairly self-explanatory about the differences between physical bullion and gold ETFs in terms of ownership and control. With physical bullion, you have both full ownership and full control of actual pieces of gold. With an ETF, you only have an ownership position in a fund that owns gold, rather than owning gold yourself.

With physical bullion, you have the advantage of owning a tangible product. No matter what the market does, you retain the intrinsic value associated with the metal itself and can take advantage of the millennia of legacy that gold enjoys.

However, as we indicated, you also need to safeguard your investment against thieves and scammers, which comes with additional costs. Physical bullion also has a liquidity problem, in that you may have to work a bit harder to convert your gold into cash than you would an ETF, and this difficulty might be troublesome if you experience a sudden change in your financial situation or lifestyle.

With a gold ETF, you don’t have to take care of any actual gold. Yet, you can still profit from the fluctuations of the market and capture some of the profit from rising gold prices.

However, because you don’t own any actual gold, you don’t have a physical thing. The ETF is subject to the risks associated with market downturn. There is a risk that the fund itself could fail and you lose your investment – a risk known as counterparty risk – that you never have to worry about with physical bullion.

Costs and Fees

The costs and fee structures associated with the two types of investments are different, too.

Initially, you are going to pay a premium over spot to buy either an ETF or physical bullion. Typically, the bullion is going to have a higher premium than the ETF.

Then, the cost structures diverge. For an ETF, your fund will charge you a percentage of your investment each year as a management fee. The amount is usually less than 1%, but it can nip the value of your investment down over time.

For physical bullion, the ongoing costs are determined by your level of prudence and care for your item. If you just want to store it in the back of your closet under a blanket, then there wouldn’t be much to worry about in terms of cost – though you would have plenty of other worries with this path.

However, for most people, there is a cost associated with securing your investment in a location that can repel thievery and/or risk from natural disasters. A safe deposit box at a local bank provides protection from thieves, but if you want full spectrum protection, you have to trade a secure storage location or private vault.

The other element that might add cost to physical bullion but not ETFs is insurance. In general, you have several options to insure your physical gold against those negative outcomes. However, ETFs are just shares of stock, basically, and they are not insured by anyone.

Overall, an ETF is the lower cost option. However, it is also the riskier option, so you have to weigh the costs against your level of risk tolerance.

Other Considerations and Risk

The value of both types of investments is subject to the ongoing spot price for an ounce of gold. However, each approach also has its own unique considerations beyond what we’ve discussed above.

Physical gold requires you to ensure that your gold is authentic and has the purity level you believe it to have. Although reputable dealers are quite adept at sniffing out fakery or shenanigans, it is ultimately up to you to guard against counterfeiting or scamming.

With an ETF, your authenticity and reputational checks are reserved for the funds and their managers, rather than the gold itself. Obviously, you want to get some kind of assurance that the gold is as real and pure as the managers say, but confirming it as such is likely to be difficult due to your indirect ownership of it. Instead, the onus is to confirm that the managers are trustworthy and able stewards of their gold reserves.

In terms of taxes, there is little to no concern about paying taxes on the front-end when you buy, regardless of which format you choose. Precious metals purchases are exempted from sales taxes in many states, and it’s unlikely you’d have to pay any tax buying a share of ETF stock.

However, on the back-end, the taxes for selling an ETF may offer an advantage over physical bullion. Due to the nature of an ETF, capital gains from the sale of your shares may – in some cases – be taxed as regular income. By contrast, your physical bullion may experience a higher tax rate if you’ve held it for longer than a year. No matter what, you should likely consult a tax professional if you’re planning on selling your gold interests.

Finally, there is one other type of risk associated with buying an ETF. When we said that only physical bullion owners need to be concerned with theft risk, we weren’t telling the full truth. The truth is that cyberthieves are more active today than ever, and they would like nothing more than to nab your shares from you. Before you purchase, you should take steps to confirm that both your fund and your own personal computer are clear from viruses and are protected from cybersecurity risks.

Conclusion

Gold ETFs and physical bullion offer very different approaches to diversifying your portfolio with precious metals. In one case, you’re essentially buying stock in a company or mutual fund. In the other, you’ve got actual metal on your hands.

If you’d like to talk more about the topic, don’t hesitate to let us know. Full disclosure – JM Bullion sells bullion, not ETFs, so we’re naturally a bit inclined toward the physical stuff. Nevertheless, we want to help you make the best decision possible for your own situation, so even if you have ETF questions, we’d still love to hear from you.