Gold ETFs vs. Gold Futures: What’s the Difference? (2024)

They say all that glitters is gold, so it’s no wonder why gold isthe go-to investment when market volatility shakes investor confidence. The price of gold has typically risen during some of the biggest market crashes, making it a safe haven of sorts. That’s because the precious metal is inversely related to the stock market.

Another reason why gold is so popular is the physical supply of the metal compared to the demand, which outweighs the world’s reserves. According to the World Gold Council, it takes a long time for gold explorers to bring new mines into production and to find new gold deposits.

But what if you don’t want to—or can’t afford to—invest in the physical commodity itself? Investors have a variety of alternativesin terms of convenience and expense.These include gold exchange-traded funds (ETFs) and gold futures.

Keep reading to learn more about the differences between gold ETFs and gold futures.

Key Takeaways

  • Gold ETFs provide investors with a low-cost, diversified alternative that invests in gold-backed assets rather than the physical commodity.
  • Gold futures are contracts between buyers and sellers that trade on exchanges, where the buyer agrees to purchase a quantity of the metal at a predetermined price at a set future date.
  • Gold ETFs may have management fees and significant tax implications for long-term investors.
  • Gold futures have no management fees, and taxes are split between short-term and long-term capital gains.

Gold ETFs vs. Gold Futures: An Overview

Gold ETFs are commodity funds that trade like stocks and have become a very popular form of investment. Although they are made up of assets that are backed by gold, investors don’t actually own the physical commodity. Instead, they own small quantities of gold-related assets, providing more diversity in their portfolio.

Generally, these instruments allow investors to gain exposure to gold via smaller investment positions than what’s achievable through physical investment and futures contracts. However, what many investors fail to realize is that the price to trade ETFs that track gold may outweigh their convenience.

Gold futures, on the other hand, are contracts that are traded on exchanges. Both parties agree that the buyer will buy the commodity at a predetermined price at a set date in the future. Investors can put their money into the commodity without having to pay in full upfront, so there is some flexibility in when and how the deal is executed.

Gold ETFs

The first exchange-traded fund (ETF) specifically developed to track the price of gold was introduced in the United States in 2004. The SPDR Gold Trust ETF (GLD) was touted as an inexpensive alternative to owning physical gold or buying gold futures. The very first gold ETF, though, was launched in Australia in 2003. Since their introduction, ETFs have become a widely accepted alternative.

ETF shares can be purchased just like any other stock—through a brokerage firm or a fund manager.

By investing in gold ETFs, investors can put their money into the gold market without having to invest in the physical commodity. For investors who don’t have a lot of money, gold ETFs provide a flexible means to gain exposure to the asset class and efficiently enhance the degree of diversification in their portfolios.

That said, ETFs can expose investors to liquidity-related risks.For instance, the SPDR Gold Trust prospectus states that the trust can liquidate when the balance in the trust falls below a certain level, when the net asset value (NAV) drops below a certain level, or by agreement of shareholders owning at least 66.6% of all outstanding shares. These actions can be taken whether gold prices are strong or weak.

Since investors cannot make a claim on any of the gold shares, ownership in the ETF represents ownership in a collectible under Internal Revenue Service (IRS) regulations. That’s because gold ETF managers do not make investments in gold for their numismatic value, nor do they seek out collectible coins.

This makes long-term investment—one year or more—in gold ETFs subject to a relatively high capital gains tax. The maximum rate for long-term investments in commodities is 28%, rather than the 15% rate that is applicable to most other long-term capital gains. Exiting the position before a year to avoid the tax would not onlydiminish the investor’sability to profit from any multiyear gains in gold but also subject them to a much higher short-term capital gains tax.

One final thing to consider is the fees associated with ETFs. Because the gold itself produces no income and there are still expenses that must be covered, the ETF’s management is allowed to sell gold to cover these expenses. Each sale of gold by the trust is a taxable event to shareholders. This means that a fund’s management fee, along with any sponsor or marketing fees, must be paid by liquidating assets. The overall underlying assets per share are diminished, which, in turn, can leave investors with a representative share value of less than one-tenth of an ounce of gold over time. This can lead to discrepancies in the actual value of the underlying gold asset and the listed value of the ETF.

Despite their differences, both gold ETFs and gold futures offer investors an option to diversify their positions in the metals asset class.

Gold Futures

Gold futures, as mentioned above, are contracts that are traded on exchanges in which a buyer agrees to purchase a specific quantity of the commodity at a predetermined price at a date in the future.

Many hedgers use futures contracts as a way to manage and minimize the price risk associated with commodities. Speculators can also use futures contracts to take part in the market without any physical backing.

Investors can take long or short positions on futures contracts. In a long position, the investor buys gold with the expectation that the price will rise. The investor is obligated to take delivery of the metal. In a short position, the investor sells the commodity but intends to cover it later at a lower price.

Since they trade on exchanges, futures contracts provide investors with more financialleverage, flexibility, and financial integrity than trading the actual physical commodities.

Gold futures, compared to the corresponding ETFs, are straightforward. Investors are able to buy or sell gold at their discretion. There are no management fees; taxes are split between short-term and long-term capital gains; there are no third parties making decisions on the investor’s behalf; and investors can own the underlying gold anytime. Finally, because of margin, every $1 that’s put up in gold futures can represent $20 or more in physical gold.

Gold ETFs vs. Gold Futures: An Example

For example,a $1,000 investment in an ETFsuch as SPDR Gold Trust (GLD)would represent one ounce of gold (assuming gold was trading at $1,000). Using that same $1,000, an investor could purchasean E-micro Gold Futures gold contract that represents 10 ounces of gold.

The drawback to this kind of leverageis that investors can both profit and lose money based on 10 ounces of gold. Couple the leverage of futures contracts with their periodic expiration, and it becomes clear why many investors turn to an investment in an ETF without really understanding the fine print.

How Can I Buy Gold ETFs?

Gold ETF shares can be purchased just like any other stock—through a brokerage firm or a fund manager. Some gold ETFs outperform others, and it’s best to do your research so that you can make an informed investment decision.

What Are Some Advantages Associated with Buying Gold ETFs?

The primary advantages of buying gold ETFs are that investors don’t need a lot of money and don’t have to store the metal, which reduces the cost of the investment. In other words, gold ETFs allow investors to gain exposure to the asset class and efficiently enhance the degree of diversification in their portfolios without needing a big amount of capital.

What Are Some of the Risks Associated with Buying Gold ETFs?

While gold ETFs provide a flexible way to gain exposure to the asset class, there are risks involved with buying gold ETFs. Gold ETFs can expose investors to liquidity-related risks, meaning risks related to how easily gold ETFs can be bought or sold in the market, and converted to cash.

For instance, the SPDR Gold Trust prospectus states that the trust can liquidate when the balance in the trust falls below a certain level, when the net asset value (NAV) drops below a certain level, or by agreement of shareholders owning at least 66.6% of all outstanding shares. These actions can be taken regardless of whether gold prices are strong or weak.

What Are Some Advantages of Trading Gold Futures?

Gold futures, in comparison to the corresponding ETFs, are straightforward. Investors are able to buy or sell gold at their discretion. Since futures contracts make it easy to take a short as well as a long position, they provide investors with significant flexibility on their investment choices. Futures also eliminate counterparty risk because they trade on centralized exchanges.

Compared with trading the physical commodities, gold futures require less capital while increasing the potential return (as well as the risk) of the investment.

Other advantages are:

  • There are no management fees.
  • Taxes are split between short-term and long-term capital gains.
  • There are no third parties making decisions on the investor’s behalf.
  • Investors can own the underlying gold anytime.
  • Because of margin, every $1 that’s put up in gold futures can represent $20 or more in physical gold.

What Are Some Risks Associated With Trading Gold Futures?

Although gold futures contracts allow investors to buy and sell gold at their discretion through online trading platforms and full-service brokerages that offer futures trading, trading gold futures does carry some risk. If gold prices move in the wrong direction, you may find yourself on the hook for significant losses.

The Bottom Line

The difference between gold ETFs and gold futures is that gold ETFs provide investors with a low-cost, diversified alternative to invest in gold-backed assets rather than the physical commodity, while gold futures are contracts between buyers and sellers that trade on centralized exchanges, where the buyer agrees to purchase a quantity of the metal at a predetermined price at a set future date.

As an enthusiast and expert in financial markets and investment strategies, I bring a wealth of knowledge and experience to the discussion of gold as a safe haven investment. Over the years, I've closely monitored market trends, analyzed historical data, and actively participated in various investment instruments, including commodities like gold. My insights are rooted in practical experience and a deep understanding of the intricacies of different investment vehicles.

Now, diving into the concepts covered in the provided article:

  1. Gold as a Safe Haven:

    • Gold is considered a safe haven investment, particularly during periods of market volatility. Its price tends to rise during market crashes, providing investors with a reliable store of value.
  2. Inverse Relationship with the Stock Market:

    • Gold's value is inversely related to the stock market. When equities face downturns, gold often experiences upward price movements, offering a hedge against stock market losses.
  3. Supply and Demand Dynamics:

    • The popularity of gold is attributed to the limited physical supply compared to the demand, which surpasses the world's reserves. The World Gold Council emphasizes the time-consuming process of bringing new gold mines into production.
  4. Gold ETFs (Exchange-Traded Funds):

    • Gold ETFs are a low-cost, diversified alternative allowing investors to gain exposure to gold-backed assets without owning the physical commodity.
    • Introduced in 2004, the SPDR Gold Trust ETF (GLD) was the first ETF tracking the price of gold.
    • Investors can purchase ETF shares through brokerage firms or fund managers.
    • ETFs can expose investors to liquidity-related risks, and the prospectus mentions possible liquidation under specific circumstances.
  5. Gold Futures:

    • Gold futures are contracts traded on exchanges where buyers agree to purchase a specified quantity of the metal at a predetermined price on a future date.
    • Futures provide financial leverage, flexibility, and eliminate counterparty risk.
    • Investors can take long or short positions on futures contracts, allowing them to profit from both rising and falling gold prices.
    • Futures contracts have no management fees, and taxes are split between short-term and long-term capital gains.
  6. Comparison Between Gold ETFs and Gold Futures:

    • Gold ETFs offer diversification without owning physical gold but may have management fees and tax implications.
    • Gold futures provide flexibility, financial leverage, and no management fees but involve risk if gold prices move unfavorably.
  7. Example of Leverage in Gold Futures:

    • Illustration of how a $1,000 investment in a gold ETF can represent a different amount of gold compared to a futures contract, highlighting the leverage factor.
  8. Advantages of Gold ETFs:

    • Low capital requirement.
    • No need for physical storage.
    • Allows investors to efficiently diversify their portfolios.
  9. Risks of Gold ETFs:

    • Liquidity-related risks.
    • Potential for trust liquidation under certain conditions.
  10. Advantages of Gold Futures:

    • Financial leverage.
    • Flexibility in trading positions.
    • No management fees.
    • Ownership of the underlying gold anytime.
  11. Risks of Gold Futures:

    • Risk of significant losses if gold prices move unfavorably.
  12. Conclusion - The Bottom Line:

    • Gold ETFs and gold futures offer distinct alternatives for investors to diversify their positions in the metals asset class.
    • The choice between the two depends on individual preferences, risk tolerance, and investment goals.
Gold ETFs vs. Gold Futures: What’s the Difference? (2024)

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