Gold ETFs vs Physical Gold: Which Is Right for Your Portfolio?

Investors seeking gold exposure face a fundamental choice between physical gold and paper alternatives like ETFs. Each approach offers distinct advantages and drawbacks that suit different investment objectives and circumstances. This comprehensive comparison helps UK investors understand both options and make informed choices.

Understanding Gold ETFs

Gold Exchange-Traded Funds are investment vehicles that track gold prices and trade on stock exchanges like regular shares. Most gold ETFs hold physical gold in secure vaults, with each share representing a fractional ownership of that gold. When you buy ETF shares, the fund purchases gold to back your investment; when you sell, the fund may sell gold to meet redemptions.

Major gold ETFs available to UK investors include iShares Physical Gold ETC, Invesco Physical Gold ETC, and WisdomTree Physical Gold. These products track gold prices closely, with minimal tracking error. ETFs charge annual management fees, typically ranging from 0.12% to 0.40%, which gradually reduce returns relative to gold spot price over time. Despite these fees, ETFs provide efficient gold exposure for many investors.

Understanding Physical Gold

Physical gold encompasses bars and coins that you own directly. Unlike ETFs, where a fund holds gold on your behalf, physical gold ownership means possessing the actual metal, either at home or in allocated storage. This direct ownership provides maximum control and eliminates counterparty risk associated with financial instruments.

Purchasing physical gold involves buying from dealers at spot price plus a premium that covers manufacturing and dealer margins. Selling involves receiving spot price minus a dealer margin. These transaction costs typically exceed ETF spreads, making physical gold less suitable for frequent trading. However, for long-term holdings, the one-time premium becomes less significant relative to potential appreciation. Check current gold prices to understand market values.

Cost Comparison

Transaction costs differ significantly between the two approaches. ETFs trade with minimal spreads, similar to liquid stocks, and buying or selling incurs only brokerage commissions. Physical gold carries higher upfront costs through dealer premiums, typically 3-8% for coins and 1-4% for bars, plus similar margins when selling. This cost structure favours ETFs for shorter holding periods.

Ongoing costs tell a different story. ETFs charge annual fees that compound over time, while physical gold incurs only storage and insurance costs if using professional vaults. Over a decade or more, cumulative ETF fees may exceed the one-time premium paid for physical gold, particularly for larger holdings where vault storage fees become proportionally smaller. Calculate total ownership costs based on your anticipated holding period.

Liquidity Considerations

Gold ETFs offer superior liquidity for most investors. Shares can be bought and sold instantly during market hours at transparent prices. There is no need to find buyers, arrange delivery, or verify authenticity. For investors who may need quick access to funds or who want to actively trade gold positions, ETFs provide unmatched convenience.

Physical gold liquidity depends on the form held. Sovereign coins and small bars from recognised refiners sell readily to any gold dealer, though the process takes longer than ETF trades. Larger bars or less recognised products may take more time to sell at fair prices. Storage location also affects liquidity; vault-stored gold can often be sold same-day, while home-stored gold requires transport to a dealer.

Security and Counterparty Risk

Physical gold's greatest advantage lies in eliminating counterparty risk. Gold in your possession or in allocated storage belongs to you absolutely, with no dependence on financial institutions remaining solvent. This property provides true financial insurance against systemic risks, making physical gold valuable in extreme scenarios where financial markets malfunction.

ETFs involve multiple counterparties including the fund manager, custodian banks, and the exchange. While major gold ETFs are well-regulated and hold physical gold backing, investors must trust these institutions to honour their obligations. During severe financial crises, even well-structured ETFs could face challenges. For most situations, this risk is minimal, but it exists nonetheless.

Tax Treatment in the UK

Tax implications may favour one option over the other depending on circumstances. Physical gold sold at profit is generally subject to Capital Gains Tax, with the notable exception of UK legal tender coins (Sovereigns and Britannias) which are CGT-exempt. Gold ETF gains are also subject to CGT, with no equivalent exemption available.

For taxable gold investments, the annual CGT exemption allows some gains to be realised tax-free. Holding gold through an ISA or SIPP can eliminate tax entirely, and some gold ETFs are available within these tax wrappers. Physical gold cannot be held within ISAs or SIPPs directly. Consider your specific tax situation when choosing between options.

Practical Convenience

ETFs win decisively on convenience for most investors. Purchases and sales happen with a few clicks through your brokerage account. There is no need to arrange storage, insurance, or physical security. Portfolio tracking is automatic, and ETFs integrate seamlessly with other investments. For hands-off investors who simply want gold exposure, ETFs minimise hassle.

Physical gold requires more active involvement. You must select a dealer, arrange payment, decide on storage, and maintain insurance coverage. Selling involves similar steps in reverse. Some investors find this process satisfying, enjoying the tangible nature of their investment. Others prefer the simplicity of ETFs. Personal preferences matter in this decision.

Combining Both Approaches

Many informed investors hold both physical gold and ETFs, using each for different purposes. Physical gold serves as core insurance holdings, providing protection against extreme scenarios and counterparty failures. ETFs provide convenient exposure for active portfolio management, tactical trading, or tax-advantaged accounts.

This combined approach captures benefits from both options. Physical gold provides peace of mind and ultimate security, while ETFs offer flexibility and convenience for the trading portion of gold holdings. The optimal split depends on individual circumstances, risk tolerance, and investment objectives. There is no single correct answer.

Conclusion

The choice between gold ETFs and physical gold depends on your priorities and circumstances. ETFs offer convenience, liquidity, and lower transaction costs, making them suitable for active traders and those prioritising simplicity. Physical gold provides direct ownership, eliminates counterparty risk, and offers tax advantages through CGT-exempt coins. Many investors benefit from holding both forms, using each according to its strengths. Consider your investment goals, holding period, tax situation, and risk preferences when making this important decision.