For decades, gold has been a cornerstone asset for hedging against inflation, currency debasement, and market volatility. Knowing how to invest in gold ETFs is no longer just about deciding to buy gold; it's about choosing the right vehicle for that exposure.
Not all gold ETFs are created equal. They differ by what they hold, how they're taxed, and, most importantly, their cost. For a professional, picking the "best" gold ETF isn't a guess—it's a data-driven comparison.
The Three Types of Gold Exposure
Before you analyze, you must understand the three primary ways ETFs provide gold exposure:
1. Physically-Backed Gold ETFs
These are the most direct. The fund (e.g., GLD, IAU) holds physical gold bullion in a secure vault. The share price tracks the spot price of gold, minus expenses. This is what most investors are looking for.
Popular Physically-Backed Gold ETFs:
- GLD (SPDR Gold Shares) - The largest and most liquid
- IAU (iShares Gold Trust) - Lower expense ratio alternative
- GLDM (SPDR Gold MiniShares) - Lower-priced shares for retail investors
- SGOL (Aberdeen Standard Physical Gold Shares) - Stored in Switzerland
2. Gold Miners ETFs
These funds (e.g., GDX, GDXJ) do not hold gold. They hold a basket of stocks of gold mining companies. This is an equity investment in the gold industry. It acts as a leveraged play on the price of gold but also carries all the risks of the stock market (e.g., company management, operational risk, political risk).
Popular Gold Miners ETFs:
- GDX (VanEck Gold Miners ETF) - Large-cap miners
- GDXJ (VanEck Junior Gold Miners ETF) - Small-cap explorers
- RING (iShares MSCI Global Gold Miners ETF) - Global exposure
3. Futures-Backed Gold ETFs
These funds use derivatives to track the price of gold. They are often used for leverage or short-term trading and carry the added complexities of "contango" and "backwardation" in the futures market.
Key Difference: Contango Cost
When gold futures trade at a premium to spot prices (contango), futures-backed ETFs lose money when rolling contracts forward. This makes them unsuitable for long-term holdings.
Common Portfolio Error: Confusing Gold Types
A common and costly portfolio error is confusing these. An investor who buys a "gold miners" ETF thinking they have a pure hedge is surprised when it falls along with the rest of the equity market.
Real Example: March 2020 COVID Crash
| Asset | Performance | Correlation to S&P 500 |
|---|---|---|
| Physical Gold (GLD) | +4.5% | Low (0.1) |
| Gold Miners (GDX) | -35% | High (0.7) |
| S&P 500 (SPY) | -34% | 1.0 |
Gold miners behaved like stocks, not like gold. Physical gold provided the hedge investors expected.
To verify what you actually own, use:
=ETFHoldings("GDX")
This will show you a list of stocks, not a bar of gold. This foundational analysis, starting with What Is an ETF? A Professional's Guide, is what separates a professional's portfolio from a retail one.
How to Find the "Best" Gold ETF: A Data-Driven Comparison
For investors seeking direct exposure, the "best gold ETF" is almost always a physically-backed fund. The choice then comes down to a battle of fees and liquidity.
Let's build a comparison model in Excel between the two largest physical gold ETFs: SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).
1. The Key Differentiator: Expense Ratio
Since both funds hold the same asset (gold bullion), their performance should be identical before fees. Therefore, the expense ratio is the single most important factor for a long-term hold.
You can pull this data directly:
=MarketXLS_ExpenseRatio("GLD")
=MarketXLS_ExpenseRatio("IAU")
Typical Results:
- GLD: 0.40% per year
- IAU: 0.25% per year
- GLDM: 0.18% per year
For years, GLD was the standard, but IAU and other funds have competed aggressively on fees. A difference of 0.10% or 0.15% compounded over a decade is a significant, unforced error. This is a core concept we cover in How to Analyze ETF Fees: What Is a Good Expense Ratio?
10-Year Cost Comparison:
On a $100,000 investment in gold ETFs held for 10 years (assuming 5% annual gold appreciation):
| Fund | Expense Ratio | Total Fees Paid | Final Value |
|---|---|---|---|
| GLD | 0.40% | $6,500 | $156,000 |
| IAU | 0.25% | $4,062 | $158,438 |
| GLDM | 0.18% | $2,925 | $159,575 |
Savings from choosing GLDM over GLD: $3,575
2. Size and Liquidity: ETF Net Assets
Size matters for liquidity and spreads. A larger fund with more net assets typically has tighter bid-ask spreads, making it cheaper to trade.
=ETFNetAssets("GLD")
=ETFNetAssets("IAU")
Typical Results:
- GLD: $60+ billion (largest, highest volume)
- IAU: $30+ billion (second largest)
- GLDM: $5-10 billion (smaller but growing)
While GLD has historically been larger and is a favorite for options traders due to its massive volume, IAU has grown significantly and offers more-than-sufficient liquidity for most institutional investors.
When GLD's Higher Liquidity Matters:
- Trading large positions (>$1M)
- Using options strategies (GLD has the most active options market)
- Requiring extremely tight bid-ask spreads for frequent trading
When IAU or GLDM Make More Sense:
- Long-term buy-and-hold (fees matter more than liquidity)
- Smaller position sizes
- Tax-deferred accounts where the collectibles tax doesn't apply
3. Track Record and Inception Date
Understanding how long a fund has been operating provides confidence in its structure and custody arrangements.
=ETFInceptionDate("GLD")
=ETFInceptionDate("IAU")
Results:
- GLD: Launched 2004 (pioneer, 20+ year track record)
- IAU: Launched 2005 (nearly as established)
Both have proven custody arrangements and lengthy operational histories.
A Critical "Pro" Note: Tax Treatment
Physically-backed gold ETFs are structured as "grantor trusts." This means they are classified as "collectibles" by the IRS. Long-term gains are taxed at a 28% collectibles rate, not the lower 15% or 20% long-term capital gains rate.
Tax Comparison: Gold ETF vs. Gold Miners ETF
| Investment | Tax Treatment | Long-Term Rate | Short-Term Rate |
|---|---|---|---|
| Physical Gold ETF (GLD) | Collectible | 28% | Ordinary income |
| Gold Miners ETF (GDX) | Equity | 15-20% | Ordinary income |
In contrast, a Gold Miners ETF (like GDX) holds stocks, and its gains are eligible for the lower qualified dividend and long-term capital gains rates. This tax difference is a crucial factor in your recommendation.
Tax Strategy Implications:
- For taxable accounts: The higher 28% collectibles rate makes physically-backed gold ETFs tax-inefficient
- For IRAs/401(k)s: Tax treatment doesn't matter—fees become the only consideration (choose IAU or GLDM)
- For high-tax investors: Consider gold miners (GDX) for lower capital gains rates, but understand the equity risk
This tax consideration is similar to the issues we discussed in A Pro's Guide to Bond ETFs: How They Work and How They're Taxed.
Building a Complete Gold ETF Analysis in Excel
Here's your complete analysis framework:
=========================
Gold ETF Comparison Model
=========================
Fund Analysis: GLD vs IAU
--------------------------
Ticker: GLD | IAU
Category: =ETFCategory("GLD") | =ETFCategory("IAU")
Fund Family: =ETFFundFamily("GLD") | =ETFFundFamily("IAU")
Inception: =ETFInceptionDate("GLD") | =ETFInceptionDate("IAU")
Net Assets: =ETFNetAssets("GLD") | =ETFNetAssets("IAU")
Expense Ratio: =MarketXLS_ExpenseRatio("GLD") | =MarketXLS_ExpenseRatio("IAU")
Risk Metrics:
--------------------------
Beta: =ETFRiskBeta("GLD") | =ETFRiskBeta("IAU")
Standard Dev: =ETFRiskStandardDeviation("GLD") | =ETFRiskStandardDeviation("IAU")
Mean Return: =ETFRiskMeanAnnualReturn("GLD") | =ETFRiskMeanAnnualReturn("IAU")
Sharpe Ratio: =ETFRiskSharpeRatio("GLD") | =ETFRiskSharpeRatio("IAU")
For a complete understanding of these risk metrics, see Measuring ETF Risk: How to Use Alpha, Beta, and Sharpe Ratio in Excel.
When to Use Gold ETFs in Portfolio Construction
Gold's role in a portfolio is as a diversifier and hedge, not a growth engine. Here's how to integrate it professionally:
Optimal Allocation Guidelines
Conservative Portfolio (Age 60+):
- 60% Stocks (VTI)
- 30% Bonds (AGG)
- 5% Gold (IAU)
- 5% Cash
Moderate Portfolio (Age 40-60):
- 70% Stocks (VTI, VXUS)
- 20% Bonds (AGG)
- 5% Gold (IAU)
- 5% Alternatives
Aggressive Portfolio (Age under 40):
- 85% Stocks (VTI, VUG, VXUS)
- 10% Bonds (AGG)
- 3% Gold (IAU)
- 2% Bitcoin ETF (IBIT)
Check for Portfolio Overlap
Even though gold is a non-equity asset, you should still verify it doesn't create unintended concentration. Use the ETF Overlap Calculator to ensure your portfolio allocation aligns with your risk targets.
For comprehensive portfolio construction principles, see How to Build and Diversify an ETF Portfolio (And Avoid Costly Overlap).
Gold ETF vs. Other Alternative Assets
How does gold compare to other alternative asset ETFs?
| Asset Class | ETF Example | Correlation to Stocks | Volatility | Primary Use |
|---|---|---|---|---|
| Physical Gold | GLD | Low (0.1) | Moderate (15-20%) | Inflation hedge, crisis hedge |
| Gold Miners | GDX | High (0.7) | High (35-40%) | Leveraged gold bet, equity exposure |
| Bonds | AGG | Low-Moderate (0.3) | Low (3-5%) | Income, stability |
| Bitcoin | IBIT | Moderate (0.4) | Very High (60-80%) | Speculation, digital gold |
For more on these comparisons, see:
Conclusion: Gold vs. Gold Stocks
The decision of how to invest in gold ETFs comes down to your objective.
For a pure, non-correlated inflation hedge:
- Choose a low-cost, physically-backed ETF (IAU or GLDM for long-term holds, GLD for active trading)
- Prioritize expense ratio over liquidity unless trading large positions
- Hold in tax-deferred accounts when possible due to 28% collectibles tax
For a high-risk, high-reward equity play on the gold industry:
- Choose a gold miners ETF (GDX)
- Understand this is an equity investment that correlates with stocks
- Benefits from lower capital gains tax rates but carries operational and stock market risk
Never confuse the two. If you're building a truly diversified portfolio, as discussed in How to Build and Diversify an ETF Portfolio, you must understand the underlying holdings.
Using =ETFHoldings("GDX") will show you a list of stocks, not a bar of gold. This foundational analysis, starting with What Is an ETF?, is what separates a professional's portfolio from a retail one.
Ready to analyze gold ETFs with precision? Start your MarketXLS free trial and access all precious metals analysis functions in Excel.
