Explained in charts: The spectacular rise of Gold ETFs and what lies ahead
Gold prices crossed a remarkable milestone by hitting a lifetime high on March 4. Analysts will be keenly watching gold, which is already riding high on the back of geopolitical tensions, in the months ahead as the US looks to cut interest rates.
On the back of a 13 percent compound return over the past three years, more retail investors have bought Gold exchange traded funds (ETF). Sovereign gold bonds (SGB) have also become popular. Retail accounts in gold ETFs also increased by more than 15 times over the last five years. As per the latest data from MF industry apex body AMFI, the total number of retail accounts in gold ETFs stood at 48.4 lakh as of December 2023.
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Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion with 99.5% purity. They track the domestic price of gold closely. These ETFs are available only on stock exchanges and you need a demat account to buy and sell them. MC30, Moneycontol’s chosen set of 30 investment-worthy mutual fund schemes, recommends Nippon India ETF Gold BeES (Gold BeES).
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Gold’s safe haven status makes it a preferred choice during market and economic uncertainties such as the Covid-19 pandemic, and more recently, the Russia-Ukraine war. Tip: Use gold more as a portfolio diversifier, though it has given handsome returns in the past few years in the wake of geo-political uncertainties.
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Despite volatility, gold prices have risen (14.4% in the last five years). “Central banks bought a lot of gold; this has been the main driver. Demand for physical gold also has been steady,” says Vikram Dhawan, Head, Commodities, and Fund Manager, Nippon India Mutual Fund. Dhawan says that gold benefits from excess money supply and low real interest rates. The surge in fiscal deficits to battle the Covid-19 induced slowdown led to excess money being printed. Low interest rates, which could happen from late 2024, are expected to push gold prices up further, analysts say.
Assets Under Management (AUM) with gold ETFs more than tripled to Rs 28,530 crore after the onset of Covid-19. Prior to that, gold returns were subdued because equity markets had rallied. The geopolitical situation (Russia-Ukraine war, Israel–Hamas war and Red Sea shipping crisis) since February 2022 have pushed gold prices up further
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Gold ETFs back their assets by buying actual physical gold of 99.5% purity. This physical gold is stored in vaults with custodian banks and valued periodically. As per World Gold Council data, Indian Gold ETFs held about 44.6 tonnes of gold as of February 2024. Meanwhile, Gold ETFs from the US and Europe held about 1,611 tonnes and 1,372 tonnes, respectively.
Traded volumes of gold ETFs on stock exchanges have improved significantly over the last few years. In 2023, the total traded volume on the NSE stood at Rs 9,002 crore.
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In India, most ETFs are thinly traded. However, there are five gold ETFs with a daily average trading volume above Rs two crore on the NSE.
How to select the best gold ETF? Look for asset size, liquidity, tracking error (TE), expense ratio, impact cost and premium or discount of the spot price to Net Asset Value (NAV). Nippon India Gold BeES, which features on the MC30, scores on all counts. The average daily total volume traded in Gold BeES on the NSE over the last 12 months was ₹22 crore, the highest among gold ETFs.
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Investors without demat accounts can consider investing in a gold fund of funds (FoFs). The good thing about gold FoFs is that they allow a systematic investment plan (SIP). Apart from the operational structure, there is not much difference between a gold ETF and a gold FoF. It’s also easier to buy/sell a gold FoF at the prevailing net asset value (NAV) at any time.
