Gold ETFs vs Gold Futures: Which is a Better Investment Vehicle?

As savvy investors continue to dive deeper into the current benefits of the gold market, they’re starting to turn to options that would have been at least unlikely and perhaps unthinkable just a few short years ago.

Two of the most intriguing ones are gold exchange-traded funds (ETFs) and gold futures. They both offer unique advantages and tradeoffs, so let’s break them down to get a better idea of how the decisions related to gold ETFs vs gold futures are being made.

gold ETF vs gold Future


Since gold ETFs sound more esoteric, we’ll define them first. Simply put, gold ETFs are commodity stocks that can be traded in the same fashion as stocks.

But investors who buy and sell these kinds of stocks don’t actually own the physical gold that’s backing their trades. They actually own various amounts of gold-related assets, with the overall goal of getting more diversity in their portfolios.

On to gold futures. These are essentially contracts that can be traded on multiple exchanges, and the buy and sell agreements include language that spells out that the transaction will occur at a predetermined price at a future date as part of the contract.

There is some flexibility involved in the trade, however. Investors can funnel money into the commodity without having to pay upfront, and this gives them more maneuverability that goes beyond the terms of the contract.

The Gold ETF Tradeoffs

Now let’s do a deeper breakdown. We’ll start with ETFs, which date back to 2004, when the first fund was developed specifically to track the ups and downs of gold prices.

The initial sales pitch was that they were an inexpensive way to own physical gold or invest in gold futures, and the purchase is now basically the same as that of any other stock in the sense that they can be bought through a brokerage firm or a specific fund manager.

There are several advantages to gold ETFs, but the biggest is that they provide a lot of flexibility for investors who don’t have a lot of capital to work with. They can invest in the gold market without having to buy and own the physical gold, so it’s a less expensive way into this particular asset class, and it gives them a means to greater diversification as well.

There are risks, though, and most of these are related to liquidity. If you buy through a trust, for instance, the trust itself can liquidate when the balance falls below a set level, or by agreement among the other shareholders in the trust, and this will happen regardless of the relative strength or weakness of the price of gold.

Shockingly, another downside pertains to the IRS. Because ownership in the ETF is considered the same as owning a collectible, ETFs are subject to a stiff capital gains tax of 28 percent, as opposed to the 20 percent rate that pertains to the majority of long-term capital gains.

One last tradeoff with ETFs is that management can decide to sell gold to cover these kinds of expenses. These sales are taxable events to shareholders, which means they have to be covered by liquidating assets, which lessens the value of the underlying remaining assets. This, in turn, may mean there are differences between the value of the gold assets and the ETF’’s listed value.

Gold Futures Tradeoffs

Now let’s take a closer look at gold futures. Some hedge fund players use futures contracts as a way to manage price risk, and gold futures give investors the ability to take long or short positions on the futures contracts they buy into.

Once again, flexibility is the key. These contracts offer more leverage as well, and they allow investors to avoid having to trade the physical commodity.

Gold futures are also more straightforward. There are no issues with taxes, management fees, or third-party decisions that can be costly, and investors can also choose to own the underlying commodity at any time.

So why not go exclusively for gold futures? Simply put, the risk is greater. If an investor buys a contract for $1K that involves purchasing 10 ounces of gold, there’s a possibility of both profit and loss, not to mention the possibility that the leverage associated with futures contracts is balanced out by the fact that they periodically expire.

So what’s the final call in this debate? As always, it depends on your needs. Both options represent unique ways to get into the gold market, so the argument shifts in favor of ETFs if you’re risk-averse vs going with gold futures or even a gold IRA if want a simpler, more straightforward investment vehicle.