A metal backed fund holds no cash to pay its bills. It settles them by selling metal, which means each share represents slightly less metal as time passes.
The fund's only asset is bullion
An unhedged physical fund holds bars in a vault and nothing else, so it generates no income from which to pay custody, management and administration costs.
Those costs are met by selling a small quantity of the metal at regular intervals, reducing the total holding without changing the number of shares outstanding.
The metal behind each share therefore declines continuously, which is the mechanical form the expense ratio takes in this kind of product.
The effect compounds over long holdings
The reduction is small in any single year and barely visible against ordinary price movement.
Over a long holding period it accumulates, and the difference between a share's metal content at purchase and at sale becomes material.
An investor comparing a fund's return against the metal price over many years is comparing two figures that were never going to match.
Published metal per share makes it visible
Funds publish the quantity of metal represented by each share, and following that figure over time shows the erosion directly.
It is a more useful comparison between funds than the stated expense ratio, because it reflects what has actually happened rather than what is intended.
It also captures any costs that fall outside the headline fee, since everything ultimately comes out of the same metal.
Physical holdings carry the equivalent cost differently
Metal stored in a vault under a private arrangement incurs a storage and insurance fee paid in cash, so the metal quantity is unchanged and the holder pays separately.
The economic effect is similar, but the holder retains the full quantity of metal and can choose to move it, sell part of it or take delivery.
Which arrangement costs less depends on the size of the holding, since vault fees have minimums that make small private holdings expensive.
Scale determines what a fund can charge
Custody and audit costs do not rise in proportion to the metal held, so larger funds spread them across more ounces.
This is why the largest funds generally carry the lowest expense ratios and why smaller ones struggle to compete on cost alone.
Smaller funds tend to differentiate on other features, such as the right for individual holders to take physical delivery, which larger funds usually restrict to institutions.