Gold ETFs are similar to mutual funds that are traded on stock exchanges, i.e., one can buy and sell units from the stock exchanges. Just as an equity mutual fund, where a pool of money is gathered from investors by an asset management company (AMC) to invest in shares, so is the case here, but with pure gold as the underlying.
The AMC allots units to the investors that can be then traded on the exchanges. The price of the ETF correlates with the underlying physical gold, adding the flexibility of equity investment to the age-old simple gold investment.
In basic terms, buying gold ETFs means purchasing gold in the electronic format.
Moreover, gold as an asset is less volatile when compared to equities. 1 Gold ETF unit is equal to 1 gram gold. So, it gives you the dual benefit of stock trading as well as gold investments. Some fund houses capitalise on gold bullion, and hence, they need to keep a close watch on the market performance. The value of Gold ETFs increases/decreases proportionally with the price of physical gold. Not only do they not compromise on purity but also promise a uniform availability across the country.