Gold and Gold Mining ETFs: What They Are and How They Work.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gold ETFs and gold mining exchange-traded funds (ETFs) invest in either gold itself or gold mining companies. Both offer a way to diversify, invest in gold, and benefit from higher prices. The key difference is in what assets these ETFs hold. Gold ETFs invest directly in physical gold bullion or use derivatives contracts to gain indirect exposure. Gold mining ETFs instead invest in the stocks of gold mining companies.

Key Takeaways

• Gold and gold mining ETFs provide exposure to the gold industry and can help diversify an investment portfolio.
• Gold ETFs hold physical gold, either directly or by using derivatives contracts.
• Gold mining ETFs hold portfolios of companies’ stocks that extract and refine the metal.
• Investors should consider expense ratios, performance, holdings, and liquidity when researching gold and gold miner ETFs.
• SPDR Gold Shares (GLD), VanEck Vectors Gold Miners ETF (GDX), and iShares MSCI Global Gold Miners ETF (RING) are popular options in this space.

How Gold and Gold Mining ETFs Work

As with other ETFs, gold and gold miner ETFs trade like shares of stock and are listed on the major stock exchanges. This means investors can buy and sell these ETFs throughout the day with low or no commissions.

For gold ETFs, each share represents a fixed amount of gold stored securely in a vault controlled by the ETF manager. They give investors exposure to the price of gold without owning the physical metal directly. Meanwhile, gold miner ETF shares represent ownership in a portfolio of gold mining firms, and their performance is tied to the profits of extracting and refining gold and broader stock market trends.

Gold ETFs

Physical gold ETFs like SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) own gold bullion stored in vaults in London, New York, Switzerland, Canada, and other safe jurisdictions. Each ETF share represents fractional ownership of the underlying gold. Some issuers offer a "mini" version of the ETF with a lower share price for smaller investors. For example, one share of GLD represents 1/10 of one ounce of gold, while the "mini" version of GLD, GLDM, holds 1/50, making it a more affordable option for those looking to invest in gold without committing too much money.

The metal is audited and insured for physical gold ETFs to confirm its bona fides. These ETFs regularly publish lists of their gold holdings, and for investors, they have fewer fees and other costs than storing the gold themselves.

Synthetic gold ETFs instead use derivatives like futures and options contracts to track the price of gold rather than owning physical gold. This can lower expenses but adds counterparty and other potential risks. Some gold ETFs may employ derivative contracts for leverage (e.g., two or three times returns) or inverse returns (i.e., the ETF’s price falls when the gold’s value rises).

Many gold ETFs track the LBMA gold price, which replaced the London Gold Fix in 2015 and is the global benchmark based on auctions between large gold traders and refiners. Other benchmarks include the Bloomberg Gold Subindex and futures prices on the COMEX in the U.S.

Investors should be aware that the storage and insurance costs are factored into the ETF’s expense ratio. Also, owning shares in these ETFs doesn’t mean you own a specific piece of gold; instead, you own a portion of the entire gold stockpile held by the ETF.

Gold Mining ETFs

Gold mining ETFs hold a basket of publicly traded gold mining stocks and related companies. Their portfolios typically include miners focusing on gold exploration, production, and processing. By owning shares of gold mining firms, the ETFs provide equity exposure to the industry rather than the price of gold itself.

While these companies’ profits are often tied to the price of spot gold, owning shares in them exposes investors to the operational risks, costs, labor issues, and geological uncertainty involved in gold mining operations.

Many gold mining ETFs hold a broad portfolio of gold producers, but some focus on so-called "junior" gold mining firms. These are smaller companies exploring or are in early production, working to identify and prove gold deposits. The rationale for carving out specific ETFs for them is that junior firms have more upside potential and more risk. As gold prices rise, junior firms may see greater growth as they produce new reserves. However, junior mining companies are less diversified in their operations, often with weaker balance sheets and higher failure rates.

Benefits and Risks of Investing in Gold and Gold Mining ETFs

The primary benefit of gold ETFs is that they expose investors to gold more easily than traditional methods. Owning gold can help diversify a portfolio and provide a hedge against inflation. ETF shares are highly liquid and can be bought and sold daily on the open market, making it easy to adjust a portfolio’s gold exposure when needed. ETFs are also transparent: the holdings are published daily, and their costs are clearly stated in prospectuses. Physical gold ETFs are also subject to audit, a crucial piece-of-mind measure given the problems of fraud that have plagued the industry back to the earliest gold coins.

While gold mining stocks and their ETFs may pay dividends, most gold ETFs do not do so or provide interest income. There are, however, exceptions like IGLD that financially engineer an income flow.

Precious metals and the companies that mine them can be highly volatile, especially the younger firms. As such, gold and mining ETFs may not be well-suited for conservative investors seeking wealth preservation.

Top Gold and Gold Mining ETFs

How Can I Buy Shares in Gold or Gold Mining ETF?

Gold and gold mining ETFs are readily available through brokerage firms. Simply research and identify the particular ETF that interests you and then load that ticker symbol into your broker’s order entry platform. Today, many brokers offer commission-free trading in ETFs.

How Do Gold and Gold Mining ETFs Compare With Other Investments?

ETFs provide more liquidity, lower costs, and storage ease than owning physical gold. However, physical gold allows true ownership while ETF holders only experience indirect exposure through the fund. ETFs are also simpler with full asset backing than when trading futures, which also have inherent leverage/contango considerations.

Is it Better to Invest Directly in Gold or in Gold ETFs?

Investing in gold versus gold ETFs depends on individual investment goals, risk tolerance, and preferences. Both options have advantages and drawbacks. Physical gold can be held and stored, offering a sense of security to many investors. Owning physical gold also means there are none of the risks associated with the management or performance of a fund.

However, extensive holdings of physical gold require secure storage and insurance, which can be costly and cumbersome. Selling physical gold can also be less convenient and take more time than selling shares of an ETF.

Can I Hold a Gold ETF in a Retirement Account?

Yes, gold ETFs can be held in a retirement account like a traditional or Roth IRA. This is beneficial, since holding physical gold in an IRA requires a special gold IRA, which has its own rules and fees.

The Bottom Line

Both gold and gold mining ETFs provide ordinary investors with an accessible and cost-effective way to diversify into gold. Gold ETFs that hold physical gold track the price of gold, while gold mining ETFs hold stocks engaged in the gold mining industry. Choosing which is best for your portfolio depends on your needs, risk tolerance, and investment goals. Regardless of which you choose, be sure to pay attention to expense ratios, liquidity measures, benchmarks, and the portfolio of ETF holdings.