With so many Gold Exchange Traded Funds (ETFs) available in the market, picking the best one could be tricky for investors. However, there are some parameters on which investors can pick the right Gold ETF.
“There are close to a dozen Gold ETFs for an investor to choose from, and the underlying assets of all Gold ETFs are similar. Also, all ETFs offer the same advantages of purity, liquidity, safety and security, and better tax benefits vis-à-vis physical gold,” says Gopal Kavalireddi, Head of Research at FYERS, an online trading and investment platform.
Experts say that there are certain differentiating factors which can aid an investor in picking the best Gold ETF.
According to Kavalireddi, the size of the corpus (AUM), Expense Ratio, Tracking Error, Traded Volumes, impact cost etc. are some of the comparable parameters, to determine the suitability of a Gold ETF as an investment.
The sum of all investments under a particular scheme is called the Corpus. An ETF with a higher corpus is better, as it implies that many investors are opting to invest in that particular scheme.
There is a charge incurred by the Asset Management Company (AMC) for managing the investments in a particular scheme, termed as the Expense Ratio. The lower the expense ratio, the better for investors.
The price of physical gold changes continuously, and most times, the Net Asset Value (NAV) of the ETF doesn’t reflect the same.
“Transaction costs and cash holdings of the scheme also result in a divergence. This is termed a Tracking Error. While a tracking error in an ETF is inevitable, investors can choose the scheme with a lower tracking error,” says Kavalireddi.
“Any divergence between the ETF return and the underlying commodity (gold in this case) is essentially the tracking error. Tracking error usually occurs due to fund expenses or any lag in deployment of surplus capital or maybe due to the inefficient management by the fund house,” says Jadon.
Liquidity is an essential parameter, as most ETFs in India have lower traded volumes. It is essential to choose an ETF that is actively traded on the exchanges and has good volumes.
“An ETFs liquidity determines the ease with which you can sell your units in the markets. If the ETF is less liquid, you might face some problems while selling the units. Or you may incur high impact costs on the exchange,” says Abhishek Jadon, smallcase manager and VP at Windmill Capital.
According to experts, any liquid asset must be tradeable for cash at a short notice. A very useful measure to determine the liquidity of an ETF is via its Impact Cost. It is basically the cost incurred to buy or sell a certain quantity of units at a given time. An ETF with a low-impact cost is better.
“While all the above factors might look daunting to a passive investor, it is easier to summarize these parameters in a simple manner. Corpus, Traded Volumes – Higher, Expense Ratio, Tracking Error and Impact Cost – Lower,” says Kavalireddi.