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Investing in Gold ETFs | Benefits of Investing in Gold ETFs

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A Guide to Investing in Gold ETFs

Updated on March 17, 2019 , 204 views

Investing in Gold ETFs is not only growing in popularity but is also considered to be one of the best ways to invest in gold. Gold ETFs have gained a lot of significance over the last decade. Gold Exchange Traded Funds first came into being in Australia in 2003 with the "Gold bullion Security" being launched. Since then many countries (including India) have launched Gold ETFs. The first gold ETF in India was the Gold BeES, this was launched in February 2007.

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How Do Gold ETFs Work? Structure of Gold ETFs

Before Investing in Gold ETFs, it is important to know the structure under which they operate. Gold ETFs are backed by physical gold at the back-end. So when an investor purchases a Gold ETF on the exchange, the entity involved at the back-end buys physical gold. The Gold ETF units are listed on an exchange, for e.g Gold BeES are listed on the National Stock Exchange (NSE) and they closely track the actual prices of gold (called spot prices). There is continuous buying and selling by "Authorised Participants" to ensure that the price of Gold ETF and gold price are the same. An Authorised Participant is an entity deputed by the stock exchange (in this case NSE) to manage the buying and selling of the underlying asset (in this case physical gold) to create the Exchange Traded Fund. These are usually very large organisations.

While the diagram below may look complex:

  • Buyer and sellers (investors) of Gold ETF use the exchange platform (NSE), so trading is easy. They can place buy & sell orders, and the broker would execute the same.
  • Any additional buying or selling net of this(after the buyer and seller transactions) is settled with Authorised Participants who buy and sell physical gold. So if there are no buyers and someone wants to sell, the Authorised Participant would create liquidity, buy buying the units of Gold ETF from the seller.

Structure-of-Gold-ETFs

Advantages of Investing in Gold ETFs

Some of the benefits of investing in Gold ETFs are:

1. Small Denomination

Going to a retailer will require a decent sum of money to buy a very small quantity of physical gold, also gold shops will not allow one to buy very small quantities of pure gold. Gold ETFs can be bought and sold in very small quantities and traded in them.

2. Cost Efficiency

Another advantage of investing in Gold ETFs is that it is cost efficient. There is no premium like making charges attached to gold ETFs, one can buy at the international rate without any markup.

3. Convenience for Long-term Holding

There is no wealth tax on Gold ETFs (in India), unlike physical gold. Also, there is no issue of storage where one is worried about security etc. The units are held in the name of the individual in a Demat account. Typically, this is a problem if one stores physical gold in good quantities at home or a bank locker.

4. Uniform Availability

There is no issue with respect to the availability of Gold Bees(or ay other Gold ETF) on the exchange, since the exchange is responsible for trading, for buying and selling.

5. Liquidity

Liquidity is available since this is traded on the exchange and there are market makers(Authorised Participants) for creating liquidity. So one does not have to worry about finding a shop to sell or even worry about mark-downs or even testing purity when faced with selling.

6. No Risk of Theft

Since the units of Gold ETFs are in the demat (dematerialized) account of the holder, there is no risk of theft.

7. Purity

One of the biggest benefits of investing in Gold ETFs the purity is constant. There is no risk to purity since each unit is backed by the price of pure gold.

Best Gold ETFs 2019

Some of the best underlying Gold ETFs to Invest in India are:

FundNAVNet Assets (Cr)3 MO (%)6 MO (%)1 YR (%)3 YR (%)5 YR (%)2018 (%)
Aditya Birla Sun Life Gold Fund Growth ₹10.209
↑ 0.16
₹632.93.54.12.1-0.16.8
Invesco India Gold Fund Growth ₹9.773
↑ 0.05
₹131.41.73.71.9-0.46.6
Reliance Gold Savings Fund Growth ₹13.3805
↑ 0.11
₹6872.62.74.21.5-0.46
SBI Gold Fund Growth ₹10.0709
↑ 0.08
₹3232.52.941.9-0.26.4
Kotak Gold Fund Growth ₹13.3626
↑ 0.03
₹1443.23.55.81.9-0.27.3
Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 19 Mar 19

Gold ETFs & Measuring Performance

The performance of Exchange Traded Funds (including Gold ETFs) and Index Funds is measured by an indicator called “tracking error”. Tracking error is nothing but a measure that sees the divergence between the ETF (or index Fund) performance and the performance of the benchmark it seeks to copy. So lower the tracking error, better the ETF.

Indians are very culturally inclined towards buying gold, whether for ornamental purposes or even for wealth creation. While earlier physical gold used to be the choice, Gold ETFs are clearly better in every aspect (except for ornamental purpose where once needs to buy physical gold), with benefits such as storage, security, wealth tax, liquidity, no mark-ups etc. One can use various choices such as Gold BeES etc where one can Buy Gold on the exchange!

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Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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