What You Own, What It Costs, and How Gold ETFs Are Taxed

GLD and IAU are two of the most popular gold ETFs among American investors. GLD, SPDR Gold Shares, was the first major gold ETF in the United States, and IAU, the iShares Gold Trust from BlackRock, followed about a year later. Both hold physical gold bars in secure vaults, and both let investors own gold through an ordinary brokerage account.

That simplicity has made gold ETFs one of the most common ways Americans invest in gold. But they are structured differently from stock and bond ETFs, they produce no income, and they are taxed under a rule that catches many investors by surprise.

This guide explains how gold ETFs work, how GLD and IAU compare, what you own when you buy one, how they are regulated and taxed, and the questions to ask before you invest. FRC has no relationship with State Street, BlackRock or any fund sponsor and no stake in what you buy: we do not sell investments, manage portfolios or earn commission, so everything here is explained impartially.

See it explained on video: the gold ETFs explainer is part of the FRC Retail Investing series on YouTube.

What a Gold ETF Is

A physically backed gold ETF is a trust that buys gold bars and stores them in vaults. Each share represents a fractional interest in the gold the trust holds, so the value of your shares rises and falls with the price of gold, before fees.

Before gold ETFs existed, investors who wanted gold had to buy coins or bars from a dealer, pay premiums over the gold price, and arrange storage and insurance. Others bought gold mining shares or futures contracts, which behave quite differently from gold itself.

A gold ETF removes most of that friction. You buy and sell shares on a US stock exchange like any other ETF, and the trust handles storage, insurance and security.

If you are new to how ETFs trade, FRC’s ETF Investing for Beginners course explains the basics step by step. To understand where gold fits alongside stocks and bonds, ETF Investing Strategies covers asset allocation and portfolio construction.

GLD Explained

GLD, SPDR Gold Shares, launched in November 2004. It was the first US-listed ETF backed by physical gold, and it remains one of the largest gold funds in the world.

The trust’s gold is held in London, with HSBC Bank as custodian. The bars are allocated, meaning specific, identifiable bars are held for the trust rather than a general claim on a pool of gold, and the trust publishes a list of the bars it holds.

GLD trades in very large volumes and has one of the most active options markets of any ETF. That liquidity makes it popular with institutions, active traders and investors who use options, and it tends to keep the difference between the buying and selling price narrow.

IAU Explained

IAU, the iShares Gold Trust, is sponsored by BlackRock and launched in January 2005. It works in the same way as GLD, holding allocated physical gold bars and aiming to reflect the price of gold, before fees.

IAU’s gold is held in vaults operated by JPMorgan, including in London, New York and Toronto. Like GLD, the trust publishes details of the bars it holds.

From the start, IAU competed on cost, charging a lower expense ratio than GLD. That has made it popular with long-term investors, for whom a lower annual fee counts for more than the deepest possible trading market.

The Lower-Cost Versions: GLDM and IAUM

Both sponsors also offer lower-cost gold funds. State Street launched GLDM, SPDR Gold MiniShares, in 2018, and iShares offers IAUM, the iShares Gold Trust Micro.

These funds hold physical gold in the same way, but charge lower expense ratios than GLD and IAU. They also trade at lower share prices, which can make them easier to buy in small amounts.

The trade-off is trading volume. GLD and IAU trade far more actively, which is more important to traders than to buy-and-hold investors. Check each fund’s website for current fees, as they can change.

GLD vs IAU: How They Compare

In terms of what they hold, GLD and IAU are very similar. Both own physical gold, both track the price of gold closely, and over time their returns have differed mainly by the difference in their fees.

The main differences are cost and trading activity. GLD charges a higher expense ratio and offers the deepest liquidity and options market, while IAU charges less and has typically appealed more to long-term holders.

Custody arrangements differ too, with HSBC for GLD and JPMorgan for IAU, though both use allocated gold and publish bar lists. Each fund’s prospectus explains its custody, insurance and audit arrangements in full.

How Gold ETFs Track the Price of Gold

Gold ETFs value their holdings using a published benchmark price for gold, such as the LBMA Gold Price set in London. The value of the gold, minus the trust’s liabilities, gives the fund’s net asset value each day.

Like other ETFs, gold trusts use a creation and redemption process to keep their share price close to that value. Large financial firms deliver gold to the trust in exchange for new shares, or return shares in exchange for gold, when demand changes.

That process generally keeps the share price close to the value of the gold behind it. Check the fund’s website for its daily net asset value and any premium or discount.

How Gold ETFs Are Regulated

Most US ETFs are registered under the Investment Company Act of 1940, which brings rules on diversification, governance and conflicts of interest. Physically backed gold ETFs are not.

GLD and IAU are trusts that register their shares under the Securities Act of 1933, which requires full disclosure in a prospectus, and their shares trade on exchanges regulated under the Securities Exchange Act of 1934. The same structure applies to spot bitcoin ETFs.

In practice, that means strong disclosure and exchange oversight, but not the full set of protections that apply to a typical stock or bond fund. FRC’s guide to bitcoin ETFs explains how this commodity trust structure works in more detail.

What You Own When You Buy a Gold ETF

When you buy GLD or IAU, you own shares in a trust that owns gold. You do not own specific gold bars yourself, and individual investors cannot generally exchange their shares for physical gold.

For most investors, that is an advantage rather than a drawback. You avoid dealer premiums, storage fees, insurance and the risk of theft that come with holding physical gold at home.

If you hold your ETF shares at a US broker, they are securities in a brokerage account. SIPC can help protect them if the brokerage firm itself fails, but no protection scheme covers a fall in the price of gold.

Gold Produces No Income

Gold pays no dividends and no interest. Its return comes entirely from changes in its price, which depend on what other buyers are willing to pay.

Because the trust has no income, it sells small amounts of gold to pay its expenses. Over time, that gradually reduces the amount of gold behind each share, which is why the expense ratio counts for so much in a long-term gold holding.

This makes gold very different from stocks, which can grow through company earnings, and bonds, which pay interest. Many investors hold gold for diversification rather than growth or income.

The Collectibles Tax Rule

This is the rule that surprises many gold investors. The IRS treats physical gold as a collectible, and because GLD and IAU are grantor trusts holding gold, shareholders are taxed as if they owned the gold directly.

In a taxable brokerage account, long-term gains on gold ETF shares held for more than a year are taxed at the collectibles rate, which can be as high as 28 percent. That is higher than the 15 or 20 percent long-term rates that apply to most stocks and stock ETFs for many investors.

Short-term gains, on shares held for one year or less, are taxed at ordinary income rates, just like short-term gains on stocks. When the trust sells gold to pay its fees, those sales can also create small taxable gains or losses for shareholders, which appear in each fund’s annual tax reporting.

Inside a traditional or Roth IRA, gains are not taxed each year, so the collectibles rate does not apply in the same way while the shares stay in the account. FRC’s guide on how to choose tax-efficient ETFs for a taxable brokerage account explains how account choice affects tax.

Gold Can Be Volatile

Gold is often described as a safe haven, and it has sometimes held up when stock markets fell. But it is far from risk-free.

Its price has gone through long periods of decline as well as strong rises. After peaking in 1980, gold spent more than two decades below that level, and after another peak in 2011 it fell sharply over the following years.

Gold can also fall at the same time as stocks, particularly during sudden market stress when investors sell what they can to raise cash. Past performance never guarantees future returns, in either direction.

Gold ETFs Compared With Other Ways to Own Gold

Physical coins and bars give you direct ownership, but you pay dealer premiums when buying and often receive less than the gold price when selling, and you must arrange secure storage. Physical gold held directly is also taxed as a collectible.

Gold mining ETFs, such as funds holding gold mining companies, are a different investment altogether. Their value depends on company profits, costs and management, so they can rise or fall much more sharply than gold itself, and they are taxed as ordinary stock funds.

Gold futures funds hold contracts rather than metal, and rolling those contracts can cause their returns to drift from the gold price. A physically backed gold ETF sits closest to the price of gold itself, inside a regulated brokerage account.

Where Gold Fits in a Portfolio

Many investors use gold as a small diversifying holding alongside stocks and bonds, rather than as a core investment. Its price has often moved differently from stocks, which can help smooth a portfolio’s ups and downs over some periods.

How much to hold depends on goals, time horizon and comfort with risk. A large position in an asset that pays no income and can fall for years can weigh on long-term growth.

Rebalancing helps keep a gold position at its intended size. When gold rises sharply, it can grow into a much larger share of a portfolio than planned, and trimming it back keeps the overall risk where you intended.

How to Buy a Gold ETF

Buying a gold ETF works the same way as buying any other ETF. You search for the ticker in your brokerage account, check that the full fund name matches the product you intend to buy, and place an order for a number of shares or, where your broker allows it, a dollar amount.

Most large US brokers charge no commission on online ETF trades, but you still pay the bid-ask spread. A limit order, which sets the highest price you are willing to pay, gives you more control over the price than a market order.

A Worked Example

Imagine two investors, each adding gold to a portfolio. The first holds IAU inside a Roth IRA as a small, long-term diversifying position, rebalancing once a year; the collectibles tax rate does not affect her while the shares stay in the account.

The second buys GLD in a taxable account after a sharp rise in the gold price and sells two years later at a profit. Because his gain is long-term and the fund holds gold, it is taxed at the collectibles rate, which may be higher than he expected.

Same metal, very different outcome. The account, the holding period and the reason for buying shape the result as much as the fund itself.

Common Mistakes With Gold ETFs

The first mistake is ignoring the collectibles tax rate in a taxable account. An investor expecting a 15 percent tax on a long-term gain can be surprised by a bill at a higher rate.

The second is treating gold as guaranteed protection. It has fallen during some market crises and spent long periods below previous highs.

The third is overlooking costs on a long-term holding, when a lower-cost gold fund holds the same metal. The fourth is confusing gold ETFs with gold mining funds, and the fifth is buying after a sharp rise purely because of recent headlines.

Questions to Ask Before Buying a Gold ETF

First, what role would gold play in your portfolio: diversification, a hedge, or a short-term trade? The answer shapes which fund and how much.

Second, which account will you use, and how will gains be taxed? In a taxable account, the collectibles rate applies to long-term gains.

Third, do you need GLD’s trading volume and options market, or would a lower-cost fund suit a long-term holding better? Fourth, could you hold through a long period of falling or flat gold prices?

Finally, read the prospectus and check the fund’s website for current fees, custody details and risk disclosures. Official documents are the source to rely on.

Common Questions

Is GLD or IAU better? Neither is better in general. Both hold physical gold and track its price closely; GLD offers the deepest trading and options market, while IAU charges a lower expense ratio.

Do gold ETFs hold real gold? Physically backed funds like GLD and IAU hold allocated gold bars in secure vaults, and both publish lists of the bars they hold.

How are gold ETFs taxed? In a taxable account, long-term gains are taxed at the collectibles rate of up to 28 percent, and short-term gains at ordinary income rates. Inside an IRA, gains are not taxed each year.

Do gold ETFs pay dividends? No. Gold produces no income, and the trust sells small amounts of gold to pay its expenses.

What is the difference between GLD and GLDM? Both are State Street gold funds holding physical gold. GLDM charges a lower expense ratio and trades at a lower share price, while GLD has far higher trading volume and an active options market.

Learning How Gold Fits Into a Portfolio Is Open to Everyone

You do not need a finance background to understand gold ETFs. Trust structure, custody, the collectibles tax rule and portfolio role can all be learned, and understanding them is what turns a headline about gold into an informed decision.

FRC’s programmes and memberships are open to everyone. Start with ETF Investing for Beginners if you are new, move on to ETF Investing Strategies to build a complete portfolio, and continue to Advanced ETF Investing when you are ready to go deeper.

FRC’s Professional Membership adds structured learning, verified progress and a growing set of tools for investors who want to keep building their knowledge. The FRC dictionary, with explainer videos on the rules behind US investing, is free for everyone.

Your Next Step

GLD and IAU make gold as easy to buy as any other ETF, with physical metal in professional custody. What they do not change is gold’s lack of income, its volatility, or the collectibles tax rate on long-term gains.

Decide what role gold would play, choose the right account, compare costs and check the fund’s website before you buy. Then carry on with FRC’s complete step-by-step guide to investing in ETFs to build the rest of your portfolio.