The Best ETFs for Investing in Gold

Gold is certainly capturing investors' attention—having just hit an all-time high of $2,641.70 per ounce on September 30, it's even flying off the shelves at Costco.

But before you rush to join the crowd, fueled by FOMO and the thrill of record prices, let's pause and consider a more strategic approach to investing in this precious metal.

Instead of physical purchases, ETFs offer a more accessible, affordable, and liquid way to invest in gold. These funds provide the benefits of gold investment without the hassles of storage and security, and they allow for easier trading and portfolio adjustments.

If you're thinking about adding gold to your investment strategy, gold ETFs could be the perfect solution. Let’s look at the reasons why these funds might be a smart choice and explore some of the top gold ETFs currently on the market.

Why buy a gold ETF?

Gold ETFs, technically known as grantor trusts, are structured this way to hold physical gold bullion on behalf of investors.

While this structure is slightly different from typical ETFs, for all practical purposes, they function similarly by allowing investors to buy shares that represent a portion of the physical gold held by the trust.

Investing in physical gold directly involves certain challenges, such as dealing with bid-ask spreads. When buying or selling physical gold, you deal with dealers who set prices based on their buy and sell rates, which can significantly impact the cost effectiveness of your transactions.

Additionally, owning physical gold comes with storage and security risks. Safekeeping gold requires a secure environment, such as a safe or a safety deposit box, and potentially insurance, especially for significant amounts.

There's also the risk of counterfeiting. For instance, PAMP 1 oz bars are particularly known for counterfeits, especially when not purchased from reputable dealers.

In contrast, investing in gold via ETFs simplifies the process considerably. You can buy and sell shares of gold ETFs just like any other stock, making it a straightforward addition to your investment portfolio.

This method is also tax efficient as there are no distributions, avoiding the potential tax implications associated with physical gold transactions.

My favorite gold ETFs

There's a lot of competition in the gold ETF space, and while there's no definitive "best gold ETF" that fits everyone, there are options that cater to various objectives and investing styles.

For those looking to actively trade gold, the top choice is undoubtedly SPDR Gold Shares (GLD). It’s the most liquid and largest gold ETF, boasting a 0.01% 30-day median bid-ask spread and $74 billion in assets under management. GLD also offers the most robust options chain, featuring a wide range of strikes and expiries.

The downsides? It has a relatively high expense ratio of 0.4% and a price per share around $245, meaning you’d need approximately $24,500 to engage in strategies like selling covered calls.

For a more budget-friendly buy-and-hold option, the SPDR Gold MiniShares Trust (GLDM) is an excellent alternative. It features a much lower price per share at around $52 and a cheaper expense ratio of 0.18%.

However, it's not as large or liquid as GLD and doesn't facilitate options trading, making it best suited for straightforward buy-and-hold strategies.

GLD and GLDM are the two main contenders in this category, and often, there's little incentive to look elsewhere. However, if you're interested in potentially saving on expenses, you might consider iShares options—the iShares Gold Trust (IAU) and the iShares Gold Trust Micro (IAUM).

These ETFs charge expense ratios of 0.25% and 0.09% respectively. Though smaller in AUM and slightly less liquid than their SPDR counterparts, both are still viable for both trading and long-term investment strategies.

Gold ETFs I would personally avoid

I'm not going to name specific ETFs to avoid, but I do recommend sticking to physically backed grantor trusts such as GLD/GLDM and IAU/IAUM for those seeking gold exposure. I think it's wise to steer clear of more exotic products, which can complicate what should be a straightforward investment.

Take gold futures ETFs, for example. These ETFs invest in futures contracts to mimic the performance of gold. However, they come with several drawbacks that make them less appealing. Investors might face the hassle of dealing with K-1 forms come tax time, potentially higher fees, and capital gains distributions that complicate tax filings.

Additionally, these products often suffer from tracking error—where the ETF fails to accurately replicate the performance of its underlying asset—and can be negatively impacted by contango. Contango occurs when future prices are higher than spot prices, leading to losses when futures contracts are rolled over at higher prices.

Gold miner ETFs also present challenges. While they are correlated with gold prices, they hold equities and hence carry market risk, reintroducing the very stock market correlation one might wish to avoid by investing in gold.

Moreover, investing in gold miners can be seen as a leveraged play on gold prices. This is because miners' operational leverage means their profitability may be disproportionately affected by changes in gold prices; when prices rise, miners' profits can surge, but when prices fall, the opposite can occur.

For those reasons, if the primary goal is to invest in gold as an asset uncorrelated with stocks, I think it's best to opt for ETFs that hold physical gold and offer a more direct and less volatile exposure to the precious metal.