Investors weighing gold ETFs against gold mining shares are really choosing between two different assets.
One owns metal. The other owns a business that digs metal out of the ground.
They behave differently, and understanding those differences is crucial for ASX investors.
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What physical gold ETFs actually own
The Global X Physical Gold ETF (ASX: GOLD) is the longest-running gold ETF on the Australian market, listed back in 2003.
The ETF's job is simple: it tracks the movement of the gold price in Australian dollars, less fees.
The fund is backed by allocated physical bullion held in London vaults, with each bar segregated and individually identified.
The management fee is 0.40% a year, which covers storage, insurance and administration.
What physical gold ETFs do not do is generate income of any kind. There is no dividend, no franking credit and no earnings growth to compound over time.
Your return is the movement in the gold price, less that annual fee, and nothing else.
The case for miners over gold ETFs
Gold miners introduce operating leverage, and that cuts both ways.
When the gold price rises above a producer's cost base, profits expand far faster than the metal price does.
When costs blow out, or a mine underperforms, the same leverage works in reverse.
Northern Star Resources Ltd (ASX: NST) illustrates the trade-off well.
Miners also pay dividends, which gold ETFs structurally cannot, and for Australian investors those payments often arrive with franking attached.
Northern Star has historically paid two fully franked dividends a year, in March and September.
For an Australian investor on a decent marginal rate, franking credits are a part of the return.
The offsetting risk is that you are now exposed to labour costs, diesel prices, grade variability and management decisions.
The S&P/ASX All Ordinaries Gold Index rose just 1% in July, while the broader ASX 200 gained 2.3%.
Recent earnings: what Northern Star reported
Northern Star's June quarter update gives a read on where costs actually sit for a large Australian producer.
The miner reported gold sales of 433,482 ounces for the quarter, up 14% on the March quarter.
All-in sustaining costs came in at $2,651 per ounce for the three months, comfortably below the prevailing gold price. Across the full year, Northern Star sold 1.543 million ounces at an AISC of $2,698 per ounce, within its cost guidance.
Management estimated FY26 earnings of between $2.86 billion and $2.95 billion.
That compares with cash earnings of $2.87 billion in FY25, so the growth is modest despite a much higher gold price.
Quarterly underlying free cash flow came in at $206 million, which is the figure that ultimately funds the dividend.
Morgans moved to an accumulate rating following the update, stating:
Costs beat at all three production centres and FY26 volumes finished above revised guidance.
Audited FY26 results and FY27 production guidance are both due on 20 August, having been deferred pending early data from the KCGM mill expansion.
Foolish takeaway
If you want exposure to the metal as a portfolio diversifier, physical gold ETFs deliver it cleanly and cheaply at 0.40% a year.
If you want franked income and the possibility of outperforming the metal, a producer like Northern Star offers that, along with the risk of underperforming it badly.
Northern Star's flat earnings against a rising gold price is a reminder that operating leverage is an additional risk to consider.
Plenty of investors hold both, and there is a sound argument for doing exactly that.
