Physical gold vs gold ETFs vs gold funds: which is right for you?

Gold comes in three very different wrappers, and first-time buyers often assume they are much the same thing. They are not. Physical gold, a gold ETF and a gold fund all rise and fall with the gold price, but they differ hugely in what you actually own, what they cost, how they are taxed, and how quickly you can sell. Here is how to tell them apart.

Physical gold: bars and coins you own outright

This is the real thing: 1oz bars, Britannias and Sovereigns, held by you or stored in a vault in your name. You own the metal itself, so no company, fund or custodian stands between you and your gold, and there is nothing to go bust. For UK buyers there is a big tax advantage too: gold coins that are UK legal tender, such as the Britannia and the Sovereign, are completely free of Capital Gains Tax however much they rise, and all investment-grade gold, bars and coins alike, is free of VAT.

The trade-offs are cost and convenience. You pay a dealer premium over the spot price when you buy, and give a little back on the spread when you sell. You have to store and insure it, and it cannot sit inside an ISA or SIPP. Selling means dealing with a dealer rather than clicking a button. This is the option Cheapest Gold is built around: we compare the real all-in cost across UK dealers so the premium you pay is as small as possible.

Gold ETFs: the gold price as a share

A gold ETF, which in the UK is technically an ETC (exchange-traded commodity), is a security you buy through any share-dealing account that tracks the gold price. The better ones are physically backed, meaning real gold sits in a London vault for every unit issued. You get price exposure with none of the storage hassle, you can buy or sell instantly during market hours, and you can hold it inside an ISA or SIPP so any gains are shielded from tax.

Costs are low but not zero. The main physically backed products charge a small annual fee, currently around 0.12% a year for the iShares and Invesco gold ETCs and about 0.39% for WisdomTree, on top of your platform and dealing charges. The catch is ownership: you hold a claim on a custodian, not metal you can put in a safe, so there is some counterparty risk, and held outside an ISA or SIPP your gains are subject to Capital Gains Tax with no legal-tender exemption.

Gold funds: managed, and often not gold at all

"Gold fund" covers two quite different things. Some are straightforward funds that hold gold or gold ETCs on your behalf. Many more are gold mining funds, which invest in the shares of gold mining companies rather than in gold itself. That distinction matters. Mining shares are geared to the gold price and can rise or fall faster than the metal, they carry company and stock-market risk, and they can pay dividends. A mining fund can beat gold in a good year and lag it badly in a bad one. Funds are actively managed, so fees are higher, often 0.5% a year or more, and like ETFs they can sit inside an ISA or SIPP.

Which is right for you?

If you want to actually own gold with no counterparty, value the CGT-free status of UK coins, and are happy to store it and hold for the long term, physical is hard to beat. If you want cheap, instant, tax-wrapped exposure to the gold price and do not mind not holding the metal, an ETF is the simplest route. If you want the geared upside, and extra risk, of the mining sector or a professionally managed position, a fund can fit, as long as you understand that a mining fund is a bet on companies, not purely on gold. Plenty of investors hold a mix: physical coins as the core, an ETF for easy top-ups.

This is general information, not financial or tax advice. Tax rules, rates and fees change and depend on your circumstances, so check the current position or speak to a qualified adviser before investing.