Are Gold ETFs Backed by Physical Gold? Storage, Delivery, and Taxes

Some gold ETFs are backed by physical gold and some are not. The largest funds traded in the U.S. — SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and SPDR Gold MiniShares (GLDM) — hold actual bullion in vaults, with each share representing a fractional claim on the metal.¹ A separate category of gold ETFs holds no metal at all and tracks gold’s price using futures contracts. The label on the fund is what tells you which structure you’re buying, and the choice affects long-term performance, the risks you take on, and how your gains are taxed.

The Two Kinds of Gold ETFs

Physically backed funds buy and store real gold bullion. Each share represents a fractional, undivided beneficial interest in the fund’s gold holdings.² When gold’s spot price moves, the share value moves with it because the metal is actually there. These funds are structured as grantor trusts registered under the Securities Act of 1933. They are not registered investment companies under the Investment Company Act of 1940, so they lack some of the structural protections that apply to mutual funds.¹

Derivative-based funds hold no gold. They use futures contracts, swaps, or other financial instruments to replicate gold’s price. Performance depends entirely on those contracts, and structural costs baked into that approach can pull the fund’s return away from gold’s actual price over time.

The confusion between the two is understandable, because both types trade on stock exchanges under similar-looking tickers and both are marketed as gold exposure. Reading the fund’s own prospectus is the reliable way to tell them apart. A physically backed fund will describe bars, vaults, and a custodian; a derivative-based fund will describe futures contracts and roll cycles.

Where the Gold Is Kept

The gold behind a physically backed ETF sits in high-security vaults managed by a custodian, typically a major bank. For GLD, the world’s largest gold ETF, the custodian is HSBC, and the metal is stored primarily in London, one of the world’s main gold trading hubs.

The bars themselves must meet London Good Delivery standards set by the London Bullion Market Association. Each bar weighs roughly 400 troy ounces and must have a minimum fineness of 995.0 parts per thousand — 99.5% pure gold.³ These specifications keep the bars uniform in quality and internationally tradeable.⁴

Every bar is tracked individually. Physically backed funds publish a complete bar list showing the serial number, refiner, weight, and vault location of each bar in inventory. This is not a summary. It is a line-by-line accounting of potentially thousands of individual bars, and the gold is fully allocated at the end of each business day. The list is typically downloadable from the fund’s website.

How the Gold Is Verified

An independent firm inspects the gold at regular intervals. For GLD, Inspectorate International Limited conducts two counts each year: a complete bar-by-bar count at the fund’s fiscal year-end in September, and a random sample count at another point during the year.⁵ Results appear in the fund’s regulatory filings on the SEC’s website.

Together, the daily bar list and the periodic inspections are what “physically backed” actually means in practice. The gold is real, identified, counted, and disclosed. Most of the assets in the gold ETF category sit in funds structured this way, and that transparency is a large part of the reason.

What Physical Backing Does Not Get You

Owning shares of a physically backed gold ETF is not the same as owning gold bars personally. Several assumptions investors carry into these funds turn out to be wrong.

You Cannot Take Delivery of the Gold

Only large financial institutions called Authorized Participants can exchange shares for physical metal. If you hold 100 shares of GLD in your brokerage account, you cannot call the fund and ask for delivery of a bar. You sell your shares on the stock exchange the same way you would sell any other security. The redemption right that validates the physical backing exists only at the institutional level.

The Gold Is Not Fully Insured

GLD’s prospectus states plainly: “The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold.”² The trust is not a beneficiary of the custodian’s insurance, has no say in coverage amounts, and cannot require subcustodians to carry any insurance at all. A catastrophic loss at the vault level could leave shareholders with an uninsured gap.

Subcustodians Add Another Layer

The custodian does not necessarily hold all the gold itself. It can delegate storage to subcustodians, and the trust’s prospectus does not require those subcustodians to be insured or bonded.² The gold is real, but parts of the storage chain fall outside the direct oversight of the fund’s trustee.

Expenses Erode the Gold Behind Each Share

A physically backed gold ETF pays its expense ratio by selling small amounts of gold from its holdings. GLD’s sponsor puts it this way: “GLD does not generate any income, and as GLD regularly sells gold to pay for its ongoing expenses, the amount of gold represented by each Share will decline over time to that extent.”⁶ At GLD’s 0.40% expense ratio, the gold behind each share shrinks measurably over a decade.⁷ Lower-cost alternatives like SPDR Gold MiniShares (GLDM), at 0.10%, slow that erosion considerably.⁸

Why Futures-Based Gold ETFs Behave Differently

A derivative-based gold ETF buys standardized futures contracts, typically on COMEX, and never takes delivery of the metal. When a contract nears expiration, the manager sells it and buys a contract with a later expiration date. This is called rolling, and it creates a cost that physically backed funds avoid entirely.

In a market condition called contango, futures further out in time cost more than nearer ones, so the fund effectively sells low and buys high with every roll. The drag compounds and causes the fund to underperform the spot price of gold over months and years. The opposite condition, backwardation, benefits the fund, but gold markets spend most of their time in contango.

These funds also carry counterparty exposure that a physically backed fund does not. Holding metal in a vault involves no contract that someone could fail to honor. A futures-based fund depends on the other side of each contract meeting its obligations. Centralized clearinghouses on regulated exchanges reduce that risk substantially, but it still exists. Funds using over-the-counter swaps rather than exchange-traded futures take on even more counterparty risk, because those agreements lack the same clearinghouse protections.

How Gold ETF Gains Are Taxed

The IRS does not treat physically backed gold ETFs like stock ETFs. Because these funds hold gold, the IRS classifies gains on shares held longer than one year as collectibles gains rather than standard long-term capital gains.⁹

Standard long-term capital gains on stocks max out at 20% for the highest earners. Collectibles gains face a maximum federal rate of 28%. If your ordinary income tax bracket is below 28%, you pay your ordinary rate instead. The 28% figure is a ceiling, not a flat rate. Investors in the 32%, 35%, or 37% brackets all pay 28% on gold ETF gains rather than their higher ordinary rate. Investors in the 10%, 12%, 22%, or 24% brackets pay their own marginal rate, which is lower than 28%.

Short-term gains, on shares held one year or less, are taxed as ordinary income regardless of the fund type.

Reporting for grantor trust gold ETFs like GLD is generally straightforward. Because the fund sells only small amounts of gold to cover expenses and makes no distributions, brokers typically handle the reporting on standard brokerage statements rather than requiring the investor to deal with a Schedule K-1.¹⁰ That is a real convenience advantage over commodity funds structured as partnerships, which do issue K-1s.

Comparing the Major Physically Backed Funds

The major physically backed gold ETFs all hold London Good Delivery bars and track the spot price of gold. They differ mainly in cost and share size.

SPDR Gold Shares (GLD): The oldest and most liquid gold ETF, with an expense ratio of 0.40%. Its high share price and deep trading volume make it a staple for institutional investors, but the expense ratio is among the highest in the category.⁷
SPDR Gold MiniShares (GLDM): Launched as a lower-cost alternative to GLD by the same sponsor. Expense ratio of 0.10%, one of the cheapest physically backed options available. Each share represents a smaller fraction of an ounce, so the per-share price is lower.⁸
iShares Gold Trust (IAU): BlackRock’s competing physically backed fund. Its expense ratio of 0.25% falls between GLD and GLDM. It stores London Good Delivery bars in vaults and publishes a daily bar list.¹¹

All three hold real gold, publish bar lists, and undergo independent inspections. For a long-term holder, the gap between a 0.40% and a 0.10% expense ratio compounds into a meaningful difference in how much gold each share represents after a decade. Choosing the cheapest option that meets your liquidity needs is the simplest way to keep more of the exposure you are paying for.

1
Securities and Exchange Commission. Goldman Sachs Physical Gold ETF Prospectus
2
State Street Global Advisors. SPDR Gold Trust Prospectus
3
LBMA. LBMA Good Delivery Rules – Technical Specifications
4
London Bullion Market Association. Good Delivery List Rules
5
Securities and Exchange Commission. SPDR Gold Trust Quarterly Report (Form 10-Q)
6
State Street Global Advisors. SPDR Gold Shares (GLD)
7
SPDR Gold Shares. SPDR Gold Shares (Ticker: GLD)
8
State Street Global Advisors. SPDR Gold MiniShares Trust (GLDM)
9
Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
10
State Street Global Advisors. SPDR Gold Trust GLD Tax FAQ
11
iShares. iShares Gold Trust (IAU)