Last week marked 20 years since the first gold-based exchange traded fund (ETF) launched in Australia, a timely milestone as the gold price hit an all-time high of almost $3000 an ounce in Australian dollar terms.

Two decades since the launch of Global X’s Physical Gold ETF (GOLD) on the ASX, investors now have several ETF options if they’re seeking gold exposure in their portfolio.

But not all ETFs are created equal, with some investing in physical gold, while others aim to track gold miners instead.

So, what option has provided the best long-term returns?

Using Morningstar Direct data, we look at the performance of ASX-listed gold ETFs and examine how they differ in their exposures to the precious metal.

What’s driving gold prices higher?

Amy Arnott, portfolio strategist for Morningstar Research Services, says gold has a long history as a safe haven for investors.

“The price of gold is largely independent of other asset classes, and it has also traditionally been used as a refuge against weakness in the US dollar. It can also serve as a hedge against inflation and market volatility.”

In general, gold is viewed as a more attractive investment option when interest rates are low. That’s because the commodity doesn’t generate any cash flow, and it’s only worth what someone else is willing to pay for it.

When interest rates rise, gold has an opportunity cost relative to other safe-haven assets, like bonds, because investors are more likely to benefit from higher bond yields. Over 2022, bond yields surged in line with interest rates.

But fears of a global banking crisis have pushed bond yields lower, bringing gold back into favour with investors.

Despite this, gold ETFs have recorded some of the largest outflows among ASX exchange-traded products in recent weeks, including Global X’s Physical Gold ETF (GOLD) and VanEck’s Gold Miners ETF (GDX).

Kanish Chugh, Global X Head of Distribution, puts this down to profit-taking, rather than weakness in the outlook for the asset class.

“Australian investors using gold as an alternative defensive asset may also be rebalancing their portfolio weightings following the steep rise in the price of gold, which would require selling off some of their holdings to bring the ratios back in line,” he adds.

While profit-taking will surely be welcomed by investors, Arnott’s analysis of gold’s function in a portfolio takes a longer-term view.

“Gold has consistently proved its mettle as a safe-haven asset and portfolio diversifier. In a portfolio context, though, its ability to improve risk-adjusted returns is a bit underwhelming. Overall, gold is best thought of as an insurance policy that’s best used in smaller doses,” she says.

6 Gold ETFs investors can access on the ASX

There are currently six ETFs listed on the ASX that fall into one of two gold-seeking strategies: physical gold ETFs and gold miner ETFs.

Four of the six ASX-listed gold ETFs are classified as ‘physical gold' funds—meaning they track the spot price of gold by directly purchasing gold and storing it in a vault either operated by the fund or a third party.

Gold mining ETFs on the other hand, look to passively track a gold mining index by replicating the weight of mining company equities—which are in turn exposed to changes in the price of gold.

While all these funds are exposed to the gold price, the return-on-investment from these ETFs have differed.

To demonstrate this, we used Morningstar Direct data to track the total returns each of these funds would deliver on an initial investment of $10,000 over the last seven years.

As VanEck’s Gold Bullion ETF (NUGG) only launched in December last year, it has been omitted from the model.

Likewise, consistent daily return data for the Perth Mint Gold ETF (PMGOLD) was not readily available and it was also omitted.

ETFs investing in physical gold

Physical gold ETFs look to replicate changes in the spot gold price, without the need for investors to purchase gold and store it themselves.

ASX-listed physical gold ETFs come in two broad varieties: currency-hedged and currency-unhedged.

An unhedged gold ETF is exposed to changes in the exchange rate between the Australian dollar and US dollar, which can magnify and minimize underlying changes in the gold price.

Put simply: if the gold price rises along with a strengthening Australian dollar, this can erode the gains on an unhedged ETF—and vice versa.

So how different are these two strategies?

Below shows the long-term performance of two physical gold ETFs: Global X’s un-hedged Physical Gold ETF (GOLD) and BetaShares’ currency-hedged Gold Bullion ETF (QAU).

Over the period, the currency-hedged gold ETF ultimately trails its un-hedged alternative as the strength of the Australian dollar has waned.

The impact of currency hedging amounts to the largest disparity between funds in the model—a difference in return of almost $3000.

Investors should not take this as an indicator of which gold fund is likely to outperform in the future, but rather note how currency hedging can impact a physical gold ETF.

Gold miner ETFs exposed to more variables

Of the six ASX-listed gold ETFs available to investors, two seek gold exposure through mining companies rather than physical gold: Betashares’s Global Gold Miners ETF (MNRS) and VanEck’s Gold Miners ETF (GDX), which track the NASDAQ Global Ex-Australia Gold Miners (AUD-Hedged) and the NYSE Arca Gold Miners Index, respectively.

Morningstar equity analyst Jon Mills says that miners can respond very differently to simpler physical hold funds.

“If you look at a gold miner like Newcrest (NCM), you're much more leveraged to what happens to the gold price because of operating costs. The miners have fixed costs which have to be borne regardless of what they're selling the gold for,” he says.

Due to this higher leverage, changes in the gold price can be magnified in gold miner ETFs but Mills also notes that, unlike physical gold, miners are much more exposed to non-gold-sectors and company-specific impacts.

That said, unlike in physical gold ETFs investors in both these gold miner ETFs benefit from dividend distributions resulting from the fund’s underlying securities, which are then distributed to investors once a year.

While gold mining ETFs still present an option for gold exposure, Arnott says their volatility means that physical gold is a “better fit” for investors wanting to use gold as a hedge against market risk. 

Gold ETF performance: the bottom line

So how did all these funds compare in the long-term model?

Over the extended timespan, Global X’s Physical Gold ETF (GOLD) significantly outperformed the other four funds, returning just over $6,000, compared to between $2,000-$3,000 in returns for the other ETFs.

BetaShares Gold Bullion ETF Ccy Hedged (QUA) was the next best performing with the two gold miner ETFs the worst performing.

While consistent data from Perth Mint’s Gold ETF (PMGOLD) was not available, the fund has tracked a broadly similar performance to Global X’s Physical Gold ETF (GOLD) over the same period.

Since launching in December 2022, VanEck’s Gold Bullion ETF (NUGG) has tracked closely to Global X’s Physical Gold ETF (GOLD) in terms of performance.