Gold ETF explained: how it works, risks, and physical gold

A gold ETF is an exchange-traded product that allows you to track the price of gold without having to buy gold bars or coins yourself. The term is widely used, but legally not always accurate: many European gold trackers are actually ETCs.

Through such a tracker, you can easily gain exposure to gold via a brokerage account. In doing so, you generally do not become the owner of a specific gold bar, but rather hold a financial instrument whose value and security depend on factors including product structure, backing, and the counterparties involved.

In this article, you will learn how gold ETFs, ETCs, and ETNs work, what risks they entail, and how they differ from physical gold.

What is a gold ETF?

A gold ETF is an exchange-traded investment product that provides investors with exposure to gold or to companies active in the gold sector. ETF stands for Exchange-Traded Fund: a fund that can be bought and sold during exchange trading hours.

With a tracker on physical gold, the price generally moves in line with the gold price, after deduction of costs and potential deviations. In addition, returns can be influenced by exchange rates, the bid-ask spread, and the precise product structure.

You can monitor the current gold price on our live gold price page. Please note that the market price of a gold tracker and the international spot price do not necessarily move exactly in tandem at all times.

What is the difference between a gold ETF, gold ETC, and gold ETN?

An ETF, ETC, and ETN can all be traded on the exchange, but they differ in legal structure and investor rights. The name of the product is therefore not sufficient on its own; the prospectus and the Key Information Document (KID) are decisive.

Due to European diversification rules for UCITS funds, products tracking exclusively the gold price are generally structured as ETCs. In practice, the term “gold ETF” is nevertheless often used as a blanket term.

An ETN is typically an unsecured debt obligation of a financial institution. With such a product, an investor may incur losses if the issuer defaults, even if the underlying gold benchmark itself has not declined. The US regulator highlights this distinct credit risk in its guidance on Exchange-Traded Notes.

A gold ETC may be backed by physical gold, but that does not automatically make the investor the legal owner of specific gold bars. For instance, an existing Physical Gold ETC document describes the product as a series of secured debt instruments linked to physical gold.

Terminology is not used in exactly the same way across all markets. Therefore, always verify the ISIN, product type, and legal documentation rather than relying solely on the words ETF, ETC, or ETN in the product name.

Is a gold mining ETF also a gold ETF?

A gold mining ETF invests in shares of mining companies and therefore does not directly track the gold price. Its value is also influenced by production costs, debt levels, management decisions, available reserves, energy prices, and the political situation in the countries where the mines operate.

As a result, a gold mining ETF can rise or fall more sharply than the precious metal itself. It is not a substitute for a physically backed gold tracker. You can read more about this distinction in our article on physical gold and gold mining shares.

How does investing in a gold ETF or gold ETC work?

Investing in a gold tracker works via a bank or broker, where you buy an exchange-traded security that seeks to track the gold price or a gold-related index. You do not receive a physical gold bar, but see the security in your investment portfolio.

The market price is formed during trading hours through supply and demand. The value of the underlying gold serves as a benchmark, but the market price may temporarily trade slightly above or below the calculated product value.

The calculated value of the underlying assets is often referred to as the Net Asset Value or NAV. For an ETC, other terms may be used, such as metal entitlement or indicative value. Consult the product documentation for the precise calculation methodology.

How does the exchange price remain close to the gold price?

The market price typically remains close to the underlying value because professional market participants can create or redeem securities to capitalize on price discrepancies. These parties are often referred to as authorized participants.

In the case of a physically backed product, gold can be delivered during the creation process, after which new securities are issued. During redemption, the reverse occurs. This mechanism supports liquidity and helps limit significant tracking deviations, but does not guarantee that the market price is always exactly equal to the value of the underlying gold.

The World Gold Council provides a more detailed explanation of the role of authorized participants in gold funds.

Does a gold tracker always track the gold price precisely?

No, a gold tracker can deviate from the gold price due to fees, spreads, currency effects, and the chosen replication method. The difference between the product return and the return of the tracked gold benchmark is known as the tracking difference.

A slight divergence is natural for a product with ongoing charges. A structurally wider deviation may point to higher expenses, less efficient execution, or specific characteristics of the product structure.

Tracking error and tracking difference do not mean the exact same thing. Tracking difference is the net return divergence relative to the benchmark. Tracking error measures how much that divergence fluctuates over time. Therefore, do not compare only the stated annual expenses, but also the historical deviations across multiple periods.

What types of gold trackers exist?

Gold trackers can be physically backed, synthetically replicated, or linked to gold mining equities. These forms all provide exposure to “gold”, but differ substantially in underlying assets and risk profile.

How does a physically backed gold ETC work?

A physically backed gold ETC is backed by gold held with a custodian or sub-custodian for the specific product structure. The amount of gold per security may decrease over time as product expenses are settled from the underlying assets or metal entitlement.

“Physically backed” does not automatically mean that every retail investor owns a specific numbered gold bar. The gold may legally be the property of the issuing entity and serve as collateral for the issued securities.

The investor’s legal rights in the event of insolvency or termination are specified in the prospectus, security documentation, and Key Information Document (KID). Therefore, check:

• whether the backing is allocated or unallocated;
• in whose name the gold is held;
• who the custodian and any sub-custodians are;
• whether an up-to-date bar list is published;
• how frequently the gold inventory is audited;
• whether the gold may be lent out or encumbered;
• what rights investors have in the event of default;
• whether physical delivery to retail investors is possible.

How does a synthetic gold tracker work?

A synthetic gold tracker tracks the gold price entirely or partially through derivatives, such as swaps or futures contracts. The issuer is therefore not required to hold an equivalent quantity of physical gold equal to the value of all issued securities.

This structure introduces contractual counterparty risk. While this risk can be mitigated through collateralization and daily settlement, it is not completely eliminated. Furthermore, the collateral does not necessarily consist of gold.

Investors should therefore verify who the counterparties are, what collateral is utilized, how frequently it is marked to market, and what happens if a party defaults on its obligations. A synthetic tracker is not inherently unsuitable, but it requires a different risk assessment than a physically backed product.

Physical ETFs claim to hold bullion while synthetic ETFs rely on bank-issued derivatives.

Do you own physical gold with a gold ETF?

No, with most gold ETFs and gold ETCs, a retail investor does not become the direct owner of specific gold bars. You purchase a security with rights determined by the legal product documentation.

Even when the product is fully physically backed, the gold does not need to be registered in your personal name. It is typically held collectively or on behalf of the issuing product structure.

This differs from the direct purchase of physical gold, where you buy a tangible gold bar or gold coin. Even with fully allocated storage, you can remain the direct owner, provided the agreement and administration clearly establish this.

What are the advantages of a gold ETF or gold ETC?

A gold tracker primarily offers trading convenience, a relatively low practical barrier to entry, and rapid liquidity during exchange hours. You do not need to arrange transportation, vault storage, or insurance for gold bars yourself.

Other potential advantages include:

• buying and selling via an existing brokerage account;
• straightforward integration into a securities portfolio;
• generally transparent exchange prices and trading volumes;
• the ability to build a position with relatively small amounts;
• easy adjustments to your position;
• often tight bid-ask spreads for larger, liquid products;
• choice between unhedged and currency-hedged variants;
• no personal responsibility for physical storage.

Storage and insurance do not simply disappear with a physically backed tracker, however. These are managed within the product structure and the costs may be incorporated into the management fee.

These advantages do not automatically make a tracker superior to physical gold. They are particularly relevant when ease of trading and integration into a securities portfolio outweigh direct ownership of the precious metal.

What are the risks of a gold ETF?

In addition to the risk of a falling gold price, a gold ETF or gold ETC entails product, counterparty, liquidity, currency, and operational risks. The extent of these risks varies by product.

What currency risk does a Dutch investor face?

A Dutch investor may face currency risk because gold is globally priced primarily in US dollars. A quotation in euros does not automatically mean that this risk is hedged.

Without currency hedging, the return in euros is influenced by both the gold price and the EUR/USD exchange rate. A EUR-hedged product attempts to mitigate this currency effect, but incurs costs to do so and cannot always neutralize exchange rate movements completely.

Therefore, verify three separate characteristics:

• the currency in which the gold or benchmark is priced;
• the currency in which the security trades on the exchange;
• whether the currency risk is actually hedged.

Can trading in a gold tracker be suspended?

Yes, trading in a gold tracker can be temporarily suspended under exceptional circumstances. This may occur, for example, during market disruptions, pricing difficulties, a closed underlying market, or a decision by the exchange or issuing institution.

During such a suspension, you may be unable to sell. When trading resumes, the market price may deviate from the last known quotation.

Physical gold has no exchange listing, but during extraordinary market conditions, it may likewise become less liquid or trade at wider spreads. Consequently, neither form guarantees instantaneous liquidation at the last known spot price at all times.

What costs are associated with a gold ETF?

The costs of a gold tracker consist of product fees, trading costs, and potential discrepancies between the market price and the underlying value. Looking solely at the stated annual fee therefore does not provide a complete picture.

The term TER (Total Expense Ratio) is widely used on comparison websites, but product documentation may also refer to ongoing charges, product fee, or expense ratio. Do not compare only the stated percentage: brokerage fees, bid-ask spreads, currency hedging, and tracking difference can also significantly affect your net return.

How do ongoing costs compound over multiple years?

Ongoing product fees gradually reduce the quantity of gold or value represented by each security. In the case of physically backed ETCs, this becomes apparent in a declining metal entitlement per unit.

The calculation below is purely illustrative and assumes:

• an initial investment value of €10,000;
• a constant gold price;
• 0.20% annual product fee;
• no brokerage commissions, spread, currency effects, or taxes.

This is not an indication of a standard or current fee. Actual costs vary by product and are subject to change. In addition, a rising or falling gold price alters the absolute euro amount deducted as fees.

What is the best gold ETF?

There is no single "best gold ETF" in a general sense, as the right choice depends on your objective, investment horizon, and preferred legal structure. Moreover, a ranking based on ticker symbols and current expense ratios quickly becomes outdated for investors, as product fees, exchange listings, tax rules, or broker availability can change.

Questions such as “what is the best gold ETF” and “which gold ETF to buy” generally seek product comparisons. The Silver Mountain does not sell ETFs or ETCs and therefore does not recommend specific trackers. However, you can use objective selection criteria to evaluate a product's characteristics and risks.

The lowest-cost product is not necessarily the most liquid, transparent, or legally straightforward. Therefore, compare at least the following aspects:

The domicile can affect applicable legislation, reporting standards, and potentially tax treatment. Do not draw conclusions based solely on the country or ISIN code; check current documentation and seek professional tax advice if in doubt.

A current ranking based on highest historical return likewise does not provide a complete picture. Returns can vary due to currency hedging, fees, and the measurement period. Therefore, assess a product on its structure and suitability rather than solely on past performance.

How can you buy a gold ETF?

You typically purchase a gold ETF or gold ETC through a bank or broker that provides access to the exchange where the product is listed. The Silver Mountain itself does not sell ETFs, ETCs, or ETNs.

A sound approach involves the following steps:

1. Define your objective: Do you want easy trading, to track the gold price, or to hold physical wealth outside the brokerage system?
2. Check the product structure: Search by name and ISIN to determine whether it is an ETF, ETC, ETN, or other security.
3. Review the documentation: Examine the prospectus, KID, annual report, custody structure, and any bar list.
4. Examine the backing: Check whether the product is physically or synthetically backed and which counterparties are involved.
5. Compare all costs: Look beyond just the annual management fee.
6. Check currency and exchange listing: A euro listing is not automatically currency-hedged.
7. Assess liquidity: Pay attention to trading volume, bid-ask spread, and exchange trading hours.
8. Check termination and delivery terms: Understand what happens if the product is liquidated and whether physical delivery is available.
9. Only then place an order: Take market volatility and the difference between a market and limit order into account.

This step-by-step guide is for informational purposes only and does not constitute a recommendation to purchase any specific product.

Physical gold remains the only way to hold a tangible asset outside the banking system.

Physical gold or a gold ETF: what is the difference?

The primary difference is that with physical gold, you purchase the precious metal directly, whereas with a gold tracker, you own an exchange-traded financial instrument. Which option is more suitable depends on your objective for holding gold.

A gold tracker may be suitable when liquidity, small transaction sizes, and portfolio management via the exchange are central. Direct physical gold may be appropriate when tangible ownership and independence from an issuing financial structure are prioritized.

Physical possession does not eliminate all risks. With home storage, theft, damage, and insurance must be considered. With external vault storage, you must examine the ownership and custody arrangements. Furthermore, purchasing physical gold involves a premium over spot and a difference between buy and sell prices.

You can learn more about the various options in “Investing in gold: what options are available?” and our general overview of investing in gold.

What role can a gold tracker play in a portfolio?

A gold tracker can be used to add exposure to the gold price via a brokerage account or to easily adjust an existing allocation. However, the product itself does not dictate how much gold is suitable for any individual investor.

That consideration depends on your financial situation, investment horizon, other asset holdings, and your ability to absorb market downturns. A gold tracker generally does not pay interest or dividends when tracking gold exclusively. Potential returns are derived primarily from price movements, net of expenses and any currency effects.

Do not confuse portfolio diversification with a guarantee against loss. While gold may behave differently from equities or bonds during certain cycles, gold prices can also experience extended downtrends or significant volatility.

You can read more about portfolio allocation in our article on asset allocation and the role of precious metals.

Buying physical gold at The Silver Mountain

At The Silver Mountain, you purchase physical gold bars and gold coins that can be delivered, collected in person, or stored on a fully allocated basis. This allows you to choose a fundamentally different ownership structure than with an ETF or ETC.

The Silver Mountain has been active in physical precious metals since 2008 and is registered under license number 12048860 in the AFM register for offering investment objects.

For gold bars, we work with producers operating refineries on the LBMA Good Delivery List. This qualification applies to the refinery and large institutional bars, not to individual retail bars or coins.

Your order can be collected in Baarn or The Hague, or delivered via our dedicated courier service. Professional vault storage is available through Edelmetaal Beheer Nederland, where precious metals are stored fully allocated and you remain the direct legal owner. Liquidation can subsequently be handled via sister company Inkoop Edelmetaal.

View our product catalog if you wish to buy physical gold, or compare our gold bars and gold coins separately.

Conclusion: look beyond the label "gold ETF"

A gold ETF or gold ETC offers an accessible way to track the gold price via the stock exchange, but it is legally and practically distinct from holding physical gold. Particularly in Europe, it is essential to first determine what type of security you are actually purchasing.

Next, verify the physical or synthetic backing, allocation, custodian, counterparties, costs, tracking difference, currency, and physical delivery terms. “Physically backed” is important information, but in itself does not prove that you are the direct owner of specific gold bars.

Therefore, choosing between a tracker and physical gold does not begin with the question of which product achieved the highest return. The primary question is what type of ownership, tradability, and dependencies align with your objectives for holding gold.