Gold ETFs – Increasing Market Penetration

Investing in stock markets is turning out to be a risky affair, as it is always surrounded by global uncertainties. Hence, the yellow metal’s shine is only becoming more attractive and a perfect hedge against rising inflation. Investment in gold can either be through purchase of physical gold or through Gold ETFs, which are special types of ETFs which invest in gold and gold related securities.

What is ETF?

ETF or Exchange Traded Fund is an investment fund traded on stock exchanges, just like stocks. ETFs can be based on any of the assets like stocks, bonds, commodities like Gold etc and is supposed to trade close to its asset value. ETFs are interesting for investors as the brokerage/maintenance costs are low and has higher liquidity compared to traditional assets especially in case of Gold. Also, they are easily tradable and have stock like features.

What exactly is Gold ETF?

Gold ETF or Gold Exchange Traded Fund is an investment fund based on Gold as an asset. The price of Gold ETF would be close to its asset value.

Presence in India

With global uncertainties and fall in the domestic price of the yellow metal, month-end assets under management (AUM) of Gold ETFs witnessed a sharp rise. With 44 mutual fund companies in India, only 11 of them have come up with Gold ETFs - Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) was the first to start a Gold ETF in March 2007. The scheme name was Benchmark Gold BeES (now known as GS Gold BeES.

Performance Review

 

 

Average Assets under Management (AAUM):

AMFI which was declaring the AUM numbers on monthly basis till Sep-10 is now declaring the AAUM (Average Assets under Management) numbers on quarterly basis after Sep-10 onwards.

On comparing of AAUM numbers, the total AUMs (Corpus) in Gold ETFs category which was 2732.44 Crs. in Sep-2010 has increased to 3765.28 in Mar-2011 (AAUM basis), which further increased to 7053.13 Crs (AAUM basis) in Sep-2011. This is an increase of 37.80% in first 6 months and 87.32% in next 6 months. On Y-o-Y basis, the increase is of 158%.

Market Share (As on Sep-10-2011):

 

 

Goldman Sachs BeES has the highest market share of 36.26%, followed by Reliance which has 27.25% of market share. Kotak Gold is the third amongst the 11 having a market share of 10.94%.

Introspection:

 ICICI Gold ETF which witnessed a highest increase of 51% in AAUM in the first 6 months has seen a decline of whopping 26% when all others have gained to their respective AAUM numbers.
 Reliance which gained 36% in the first half, gained a humongous 342% in the second half which amounts to an addition of 1487.51 Crs in it’s AAUM kitty in the second half.

 Kotak Gold ETF’s AAUM increased a huge 200% in the second half in comparison to a meager 12% in the second half.

 HDFC which lost it’s footing by 2% in the first half, gained 11.5% in the second half.

 Religare Gold ETF was the laggard among the gainers in the first half (10%) and the second half (7.59%) respectively.

 

Expense Ratio:

Source: Value Research Online

ICICI Prudential Gold ETF has the highest Expense Ratio amongst all followed by Birla Sun Life Gold ETF.

Year-On-Year Returns

Yearly Returns (in %) terms - (As on 09-11-2011)

All The ETFs have gained in the range of 38.03% to 39.04%.Reliance Gold ETF has gained the most (39.04%) in the category and ICICI Prudential Gold ETF has gained the least (38.03%) amongst all.

Outlook:

ETFs have outperformed all other mutual fund categories under various time horizons. This can also be viewed from the fact that 75-80% of the ETF turnover under the National Stock Exchange (NSE) is governed by the Gold ETFs. Thus the various benefits mentioned above, coupled with satisfying the need of small and medium investors to invest and accumulate gold units through SIPs has made Gold ETFs more and more attractive. ETFs have also outperformed the benchmark index, BSE Sensex and S&P Nifty, which represents the overall market.

Investor interest in ETFs is also attributed to low cost, transparency and ease of transaction. If the trend continues, ETFs corpus will continue to grow and this might lead to more ETF variants being launched in the near future and a more matured ETF market.

In US, there are already different types of Gold ETFs available for trading.

Gold ETFs investing in physical Gold: They are the ones which we have in most countries. As mentioned earlier, they are backed by physical Gold. Some of the Gold ETFs in this category: SPDR Gold Trust (GLD), iShares COMEX Gold Trust (IAU) etc.

Gold ETFs investing in Gold futures: They are the ones which invest in Gold bullion futures rather than directly investing in physical gold. Investors interested in high leverage trade in such ETFs as the leveraged Gold ETFs allow traders to gain multiples of their investment through leverage. One of the Gold ETF in this category: PowerShares DB Gold (DGL).

 

Short Gold ETFs: These ETFs are inverse in nature i.e. when gold prices move northwards, the price of gold ETF comes down. One of the Gold ETF in this category: Ultra Short Gold ProShares (GLL).

 

Gold Miner ETFs: These ETFs invest in the shares of gold mining companies. Some of the Gold ETFs in this category: Market Vectors Gold Miners ETF (GDX), Market Vectors Junior Gold Miners ETF (GDXJ), PowerShares Global Gold & Prec Metals (PSAU).