For most investors who want exposure to gold rather than the object itself, a physically backed gold ETF is the better default: a fund like GLDM holds vaulted bullion for a 0.10% expense ratio, trades in one click at a penny spread, and needs no safe or insurance. Physical gold has no expense ratio, but it carries a dealer premium of roughly 2-8% when you buy, a second markdown when you sell, and ongoing storage and insurance — so its all-in cost over a normal holding period is usually higher. The one thing an ETF cannot give you is direct possession with no counterparty. And a rule that catches almost everyone: both the ETF and the coin are taxed as collectibles, at a maximum federal rate of 28% on long-term gains — not the 15-20% a stock ETF gets.
“Gold ETF vs physical gold” usually gets argued as paper-versus-real, as if one is a claim and the other is money. That framing misses the two things that actually decide it for a normal investor: what it costs to own each over the years you will hold it, and how each is taxed when you sell. On both, the answer is less romantic and more numeric than the debate suggests.
What a Gold ETF Actually Owns
A physically backed gold ETF owns allocated gold bars held in a vault by a custodian. Each share represents a fixed fraction of an ounce that ticks down slightly over time as the fund sells a sliver of metal to cover its expense ratio. The bars are audited and the holdings are published. This is not the same as a gold futures ETF, which holds derivative contracts instead of metal and can drift from the spot price because of the cost of rolling contracts — a distinction worth confirming before buying anything with “gold” in its name. The four large physically backed funds, with current expense ratios from their issuer pages:
| Fund | Name | Vault | Expense ratio |
|---|---|---|---|
| GLDM | SPDR Gold MiniShares | London | 0.10% |
| SGOL | abrdn Physical Gold Shares | Zurich | 0.17% |
| IAU | iShares Gold Trust | London | 0.25% |
| GLD | SPDR Gold Shares | London | 0.40% |
| Physical | Coins / bars you hold | Your safe | None (premium + storage) |
Sources: SPDR GLDM and iShares IAU fund pages, 2026. All four hold real bullion; the only thing that separates GLDM at 0.10% from GLD at 0.40% for a buy-and-hold investor is the fee. GLD’s premium buys its deep options market and razor-thin trading spread, which matter to large traders and not at all to someone dollar-cost-averaging into a diversifier. Fee gaps this small look trivial and are not — the same compounding we quantify in ETF fee drag by expense ratio turns 0.30% a year into thousands of dollars over a decade.
The Cost That Physical Gold Hides
Physical gold’s appeal is that it has “no fee.” That is true of the annual expense ratio and false of the total cost. Buying a gold coin or small bar means paying a dealer premium over the spot price — commonly 2-8%, higher for small denominations and popular coins. When you sell, you take another haircut to the dealer’s buy price. That round trip alone can exceed a decade of a cheap ETF’s expense ratio before you count the cost of a safe-deposit box or a home safe and the insurance to cover it. The metal earns nothing while it sits there, so every one of those costs is pure drag.
None of that makes physical gold irrational. It buys one thing an ETF cannot: possession with no custodian, no brokerage, and no fund company between you and the metal. For an investor whose entire reason to own gold is protection against exactly those institutions, that is the product, and the premium is the price of it. For an investor who simply wants gold to move differently from stocks in a portfolio, it is a cost with no matching benefit.
The Tax Rule That Catches Everyone: 28% Collectibles
Here is the part that surprises even experienced investors. The IRS classifies gold — and funds that hold physical gold — as collectibles. Under IRS Topic No. 409, the net capital gain from selling a collectible held more than a year is taxed at a maximum rate of 28%, rather than the 0%, 15%, or 20% long-term rate that applies to a stock or a stock ETF like VOO. The 28% is a ceiling, not a flat rate: if your ordinary income tax rate is below 28%, that lower rate applies instead. Held a year or less, gains are ordinary income either way.
Crucially, the wrapper does not save you. A physically backed gold ETF is a grantor trust, so the IRS looks through the fund to the metal — GLD, IAU, SGOL, and GLDM all fall under the collectibles rule, exactly like a coin in a drawer. The one gold investment that escapes it is a gold-miner equity ETF such as GDX, which owns shares of mining companies rather than bullion and is therefore taxed at the ordinary long-term capital-gains rate. This is the same look-through logic behind why in-kind redemptions make most equity ETFs tax-efficient and why gold is the exception, which we cover in how ETFs are taxed.
Two practical consequences. First, the collectibles rate is a taxable-account problem only — hold a gold ETF inside a Roth or traditional IRA and the sale is not taxed in the account at all, which is one of the cleaner ways to own gold. Second, when comparing gold’s after-tax return to a stock fund’s, use 28% for gold and 15-20% for the stock fund; a naive comparison at the same rate overstates gold’s edge.
Gold ETF vs Physical Gold, Side by Side
| Feature | Gold ETF | Physical gold |
|---|---|---|
| Annual cost | 0.10%-0.40% expense ratio | None, but storage + insurance |
| Cost to buy/sell | Penny trading spread | 2-8% dealer premium each way |
| Custody | Vaulted by custodian | You hold it (or pay a vault) |
| Counterparty risk | Fund + custodian | None |
| Liquidity | One click, market hours | Find a dealer, negotiate |
| Long-term tax | 28% collectibles max | 28% collectibles max |
| Held in an IRA | Yes, standard brokerage IRA | Only via self-directed IRA rules |
| Best for | Portfolio diversifier | Direct possession, no counterparty |
When Physical Gold Is Worth the Premium
There are genuine reasons to pay for the real thing, and they all reduce to one: you want the metal itself, outside the financial system, in your control.
- No counterparty, on principle. If your reason to own gold is distrust of custodians, funds, and brokerages, an ETF reintroduces the exact intermediaries you are trying to avoid. Physical gold does not.
- A small, portable store of value. Coins can be held, gifted, or moved in ways a brokerage position cannot. For some that optionality is the point.
- Very long holding periods. Amortized over decades, the one-time dealer premium becomes a smaller annual drag — the longer you hold, the more the “no expense ratio” claim starts to mean something.
For everything else — a diversifier you will rebalance, an inflation hedge you want to trade cleanly, gold exposure inside a retirement account — the ETF wins on cost, liquidity, and convenience. How much of a portfolio should sit in gold at all is a bigger question than the wrapper; a few percent as a diversifier is a common answer, and it belongs in the same conversation as how much you actually need to retire, not decided in isolation.
The Rule of Thumb
Ask one question: do I want gold, or do I want to hold gold? If you want the exposure — a diversifier that trades cleanly and costs almost nothing to carry — a low-fee physically backed ETF like GLDM does the job for a tenth of a percent, and belongs in an IRA where the collectibles tax never bites. If you want the object — possession, no counterparty, metal you can hold — buy physical, and treat the dealer premium and storage as the price of that independence rather than a cost to minimize.
Caveats
Expense ratios are from issuer fund pages in 2026 and change over time; verify current figures before buying. Dealer premiums vary widely by product, quantity, and dealer. Tax treatment described here is the general federal rule for US investors — the 28% collectibles rate is a maximum, state taxes differ, and individual situations vary; confirm with IRS Topic 409 or a tax professional. Gold pays no income and can fall in value. Nothing in this article is investment or tax advice.