What Investors Need to Know When Comparing Risks of Gold ETFs vs. Physical Gold

With gold prices surging to historic highs in recent weeks, many investors are considering adding gold to their portfolios. Although the precious metal saw its performance falter in 2022 thanks to rising interest rates and a strong dollar, recent geopolitical events have significantly increased gold’s safe-haven appeal among investors.

Gold has traditionally acted as a stabilizing asset that can protect portfolios from market volatility and inflation. Now that the ongoing conflict in Gaza is increasing fears of a broader conflict in the oil-producing region disrupting the global economy, investors stand to benefit a great deal by adding gold to their portfolios.

While the traditional way of investing in gold involves buying physical gold bullion or coins, investors can also purchase gold exchange-traded funds (ETFs) shares. ALINE Wealth founder and CEO Peter J. Klein explains that physical ETFs involve the issuing company purchasing and storing gold bullion. This type of gold ETF allows investors to gain exposure to the precious metal without having to go through the stress of holding physical gold bullion or coins.

Gaining exposure through physical gold ETFs generally tends to be as safe as investing in gold bars or coins because the ETFs are backed by actual gold.

Physical gold ETFs may be preferable to gold bullion and coins because they have high liquidity and can be sold quickly and with little effort. However, Kristopher Curtis Financial partner and financial advisor Kris Whipple says that physical gold ETFs may not be preferable for investors who want to use gold as a usable tender other than fiat currencies.

Gold mining ETFs, on the other hand, tend to have highly diversified portfolios of domestic and international gold mining companies. Investing in gold-mining ETFs puts investors at the mercy of gold prices because share prices and profitability of these companies are ultimately determined by gold prices.

Despite being generally well diversified, gold mining ETFs face the risk of shrinking or failing companies on the portfolios contributing to poor ETF performance.

Generally, gold ETFs beat physical gold coins and bars at diversification. While a gold bar will only ever be a gold bar, ETFs tend to have much more diversity outside of just physical gold. These ETFs could grant investors exposure to a mix of domestic and international companies of varying sizes because they often invest in a wide range of companies.

Investing in physical gold can also be costlier because it involves paying the spot price as well as a dealer fee. Smaller purchases tend to involve larger per-ounce dealer fees, meaning small investors have little financial incentive to invest in physical gold. On the other hand, gold ETFs have lower entry costs as ETF shares can cost as low as $25, meaning essentially anyone can invest in a gold ETF.

If your interest is more toward gold mining stocks, it is prudent to conduct extensive due diligence on leading mining companies such as Newmont Corporation (NYSE: NEM) (TSX: NGT) and choose those that meet your investment criteria.

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