The Most Affordable Way to Buy Gold: Physical Gold or ETFs?

Gold—valued for thousands of years as a currency, commodity and investment—is popular among today’s investors because it can be used as a hedge against currency devaluation, inflation, or deflation. It's also liked for its ability to provide a "safe haven" during times of economic uncertainty.

The gold market is highly liquid and there are a number of ways in which investors can gain exposure to this precious metal, including holding physical gold (in other words, gold coins and bars) and exchange-traded funds (ETFs). 

Physical Gold

Physical gold provides the most direct exposure to gold. Gold in bulk form is referred to as bullion, and it can be cast into bars or minted into coins. Gold bullion’s value is based on its mass and purity rather than monetary face value. Even if a gold coin is issued with a monetary face value, its market value is tied to the value of its fine gold content.

Investors can buy physical gold from government mints, private mints, precious metals dealers, and jewelers. Because different sellers may offer the exact same item at different prices, it is important to do your research to find the best deal. When you purchase physical gold, you must pay the full price.

Physical gold ownership involves a number of costs, including storage and insurance costs, and the transaction fees and markups associated with buying and selling the commodity. There also can be processing fees and small-lot fees for investors making limited purchases. While collectively these costs may not significantly affect someone looking to invest a small portion of their portfolio in gold, the costs may become prohibitive for investors seeking to gain larger exposure.

Gold ETFs

Unlike physical gold, ETFs can be purchased like shares on a stock exchange. ETFs allow investors to access gold while avoiding the costs and inconvenience of markups, storage costs, and security risks of holding physical gold. An investor will lose a percentage of his or her investment’s value each year to the fund’s expense ratio. An expense ratio is the recurring annual fee charged by funds to cover management expenses and administrative costs. The largest gold ETF—the SPDR Gold Shares ETF—for example, had an expense ratio of 0.40% as of mid-January 2023. That means an investor would pay $80 per year in fees for a $20,000 investment.

Investors also will pay a commission for buying and selling an ETF. While most online commissions run under $10, the commissions can really add up if you are an active trader. In addition, brokers typically charge a higher commission that can be upwards of $25 per trade for broker-assisted trades, automated phone orders, and special order types.

To address investors’ concerns regarding ETF commissions, some brokerage firms now offer commission-free online trading for a specified suite of ETFs. For example, you can trade the Aberdeen Standard Gold ETF (SGOL) without a commission at the Schwab ETF OneSource platform.

There are more than a dozen gold-specific exchange-traded products available today, including inverse and leveraged ETFs. Keep in mind that you don't own any physical gold even if you invest in a physically backed ETF: You can't redeem or sell shares in exchange for gold.

Low-Cost ETFs for Gold

As of January 2023, here are five of the most affordable gold funds by expense ratio:

iShares Gold Trust (IAU)

The iShares Gold Trust is designed to correspond generally to the day-to-day price movement of gold bullion, and shares are backed by physical gold. The fund is backed by physical gold held in vaults in Toronto, New York, and London. IAU, which was launched on Jan. 21, 2005, has an expense ratio of 0.25% and total net assets exceeding $27 billion.

Aberdeen Standard Gold ETF Trust (SGOL)

The Aberdeen Standard Gold ETF Trust, mentioned earlier, is designed to track the price of physical gold bullion. Shares are backed by physical gold held in vaults in Switzerland and the U.K. SGOL, which was launched on Sept. 9, 2009, has an expense ratio of 0.17%, and total net assets of nearly $2.4 billion.

GraniteShares Gold Trust (BAR)

The GraniteShares Gold Trust ETF seeks to reflect the performance of the price of gold by investing in physical gold bullion. It is one of the lowest-cost ETFs that is physically backed by gold. GraniteShares Gold Trust launched on Aug. 31, 2017, and has an expense ratio of 0.175% and net assets of $934 million.

SPDR Gold Shares (GLD)

The SPDR Gold Shares ETF, mentioned earlier, is designed to track the spot price of gold bullion and the fund holds 100% physical gold assets in HSBC’s vault in London. GLD, which was launched on Nov. 18, 2004, has an expense ratio of 0.40% and total net assets of more than $56 billion. 

VanEck Gold Miners ETF (GDX)

The VanEck Gold Miners ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry. GDX, which was launched on May 16, 2006, has an expense ratio of 0.51% and total net assets of nearly $12 billion.

The Bottom Line

The transaction costs associated with gold ETFs are often lower than the costs related to the purchase, storage, and insurance of physical gold. But it's important to scrutinize the related expenses of each type of gold investment to find the one that's most cost-efficient and best overall for your portfolio.