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In the world of investing, gold stands as a unique asset class that offers a store of value outside traditional markets like stocks, bonds, and foreign exchange. Gold Exchange-Traded Funds (ETFs) have become popular among investors for diversification, hedging against weakening currencies, inflation risks, providing a safe haven from global volatility, or speculation. As of 2025, gold ETFs boast a combined net asset value of $176 billion.
When selecting the best gold ETF, several key factors come into play.
Type of Gold ETF Relative to Investment Objective
For short-term traders, ETFs linked to gold futures or leveraged ETFs may be preferable. They track price fluctuations and offer potentially amplified returns. On the other hand, for long-term investors or those seeking to hedge, ETFs physically backed by gold are optimal as they hold actual gold bullion and track gold prices more closely to preserve capital and hedge inflation risks.
Expense Ratio and Costs
Lower expense ratios and trading costs improve net returns, making physically backed gold ETFs typically more cost-effective than mutual funds or other gold investment vehicles. Notably, SPDR Gold MiniShares combines a low fee and low trading costs, making it the best choice for most investors.
Liquidity
ETFs with higher liquidity allow for easier buying and selling with tighter bid-ask spreads, reducing transaction costs. SPDR Gold Shares, for instance, has the lowest trading costs among the eight largest gold ETFs, with a daily average bid-ask spread to price ratio of 0.007%.
Tracking Error
A low tracking error indicates the ETF closely follows gold’s price movements, important for investors seeking pure gold exposure.
Holdings Transparency
Review how much of the ETF's portfolio is actually invested in physical gold. Some ETFs invest in gold stocks or futures rather than bullion, which affects risk and performance consistency.
Fund Size and Market Capitalization
Larger ETFs tend to offer greater stability, liquidity, and lower bid-ask spreads. SPDR Gold Shares, launched in 2004, has grown to over $100 billion in net assets, making it the largest gold ETF.
Fund Ratings and Management Quality
Analyst ratings, like Morningstar’s Medalist Ratings, assess a fund’s ability to outperform peers considering fees and risk. Top-rated ETFs tend to be low-cost, passively managed funds tracking broad gold indices.
In summary, selecting the best gold ETF hinges on matching the ETF structure and attributes—such as physical backing, cost, liquidity, and tracking accuracy—to your investment horizon and risk tolerance. For investors trading once a year, the trading costs for lower-cost ETFs may be worthwhile given the annual fee advantage. It's essential to consider these factors carefully when making your investment decisions.
[1] Investopedia. (2021, March 26). How to Choose the Best Gold ETF for Your Portfolio. Investopedia. https://www.investopedia.com/articles/etfs/08/choose-gold-etf.asp [2] Investopedia. (2021, March 26). Gold ETFs: Pros, Cons, and How They Work. Investopedia. https://www.investopedia.com/terms/g/gold-etf.asp [3] Morningstar. (n.d.). Gold & Precious Metals Category. Morningstar. https://www.morningstar.co.uk/uk/funds/category/gold-and-precious-metals/x/all
When making an investment decision on gold ETFs, it's crucial to consider the type of ETF, including whether it is physically backed or linked to gold futures, as this can impact the ETF's ability to track gold prices and provide a store of value. Lower expense ratios and trading costs in physically backed ETFs like SPDR Gold MiniShares can contribute to improved net returns. Lastly, liquidity, tracking error, holdings transparency, fund size, ratings, and management quality are additional important factors to evaluate before investing in gold ETFs.
