Who is Eating my Gold ETF Return?
(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
(Updates 02May2024, 15Jan2024, 16Oct2023, 30Apr2023, 13Jan2023, 23Oct2022 and 08Jul2022 with new information are available at the end of this blog post)
One of the investment avenues available for investors is gold exchange traded fund or ETF. Exchange traded funds are traded on stock exchanges, similar to stocks. They are convenient and can be bought and sold during market hours on stock exchanges.
Gold ETFs are expected to track the performance of their underlying asset, that is, gold. As per the National Stock Exchange, there are eleven gold ETFs in India.
An analysis of their returns shows that the gold ETFs are unable to match the returns of the underlying asset, that is, gold. In general, ETF investment vehicle will be under-performing the underlying asset to some extent, due mainly to tracking error and fund management expenses.
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The following table presents quarterly data of gold ETFs: (please click on the image for better view) >
Gold ETF Returns
Let us look at the data in the above table. In the past four years (between Dec2017 and Dec2021), gold price grew by 67 per cent from Rs 28,760 to Rs 48,080 (gold price for 10 grams with 999 fineness).
Whereas, a gold ETF's net asset value increased by only 57 per cent from Rs 26.40 to Rs 41.70--this is the NAV of Nippon India ETF Gold BeES fund (this fund is used just for illustration purpose -- returns of other ETFs are on similar lines).
Over a four year period, the difference is 10 percentage points between the ETF and the underlying asset. This difference is huge considering the fact that gold as an asset routinely fails to beat inflation rate in India.
If an investor were to invest for longer time period, say, 10 or 15 years, her gold ETF returns will be eaten away by fund management expenses.
Expense ratios of these gold ETFs range from 0.35 to 0.80 per cent. Globally, expense ratios of gold ETFs are more competitive. Of course, size of the asset class also matters. Indian gold ETFs have puny asset size compared to their global peers.
Gold ETF asset growth
Whenever the gold prices rise, investors tend to flock to gold ETFs as a short term opportunity. This can be observed from the quarterly data of asset growth shown above (it may be added that asset size growth depends on fresh inflows / outflows and the increase / decrease in the gold price).
For example, in 2019 and 2020, gold ETF assets have grown by almost three times as gold price in rupees had risen by 68 per cent from Rs 31,710 in Dec2018 to Rs 50,200 in Dec2020.
As gold price remained subdued in 2021, the growth in assets remains much lower as compared to 2019 and 2020.
Gold Price Drivers
Gold prices in India are driven mainly by international gold price (denominated in US dollars) and the exchange rate of the US dollar and Indian rupee.
For several decades, rupee has been depreciating against the US dollar. As such, gold prices in India have shown big increases thanks to the rupee depreciation.
As can be observed from the data presented above, the US dollar appreciated from 63.93 to 74.30, between Dec2017 and Dec2021, a gain of more than 16 per cent for the US dollar.
Interestingly, international gold price grew by only 44.7 per cent between 2017 and 2021. But India gold price grew by 67.2 per cent--the difference is due to rupee's depreciation versus the US dollar.
To Sum Up
Investors need to be aware of the above price dynamics and the return erosion from high expense ratios of the gold exchange traded funds in India. This is just for educational purpose and should not be construed as investment advice.
As an asset class, gold has been frustrating global investors in the past 20 months.
The loss of investor interest in gold is often attributed to the spectacular rise of crypto assets (like, Bitcoin, Ethereum and Solana) since the outbreak of the Corona Virus in 2020. It is said that crypto currencies are eating gold's lunch.
But since the beginning of this year, crypto assets have lost USD 600 billion in market cap or 26.7 per cent of their total value--whereas gold remained steady in the same period, that is, year-to-date.
Gold has often been presented as an inflation hedge. This thesis also seems to be not working at the market level currently. With inflation running very high in the US (7 per cent consumer price inflation last month) and other major nations, gold price remains lacklustre in 2021.
In my opinion, gold as an asset is useful only for diversification purposes. In an age when fiat currencies are losing their purchasing power continually over several decades, gold may present a viable alternative in the next three to five years for long-term patient investors.
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P.S.: Update dated 02May2024 with info on quarterly growth rates as at close of 31Mar2024 >
P.S.: Update dated 15Jan2024 with info on quarterly growth rates as at close of 31Dec2023 >
In the fourth quarter of 2023, AUM of gold ETFs grew by 14.8 percent -- most of the growth can be attributed to growth in gold price during the Oct-Dec2023 quarter. Gold price in rupees rose by 9.6 percent; while it rose by 11.1 percent in dollar terms.
While rupee gold price grew by 9.6 percent, Gold BeES NAV rose by only 8.9 percent -- due to the fact that investor return is eaten away by high expense ratios of gold ETFs and tracking error (TE).
During the calendar year 2023, gold ETF asset growth is at 27.4 percent driven by growth in gold price by 15.3 percent in rupee terms (gold price rose by 13.2 percent in dollar terms), but Gold BeES NAV growth was only 12.7 percent -- due to high expense ratio of ETFs and tracking error.
Between Dec2017 and Dec2023, gold price in rupees grew by 120 percent, while the NAV of Gold BeES grew by 103 percent -- a loss of almost 17 percent for gold ETF investors due to high expense ratios and tracking error.
P.S.: Update dated 16Oct2023 with info on quarterly growth rates as at close of 30Sep2023 >
Year-to-date (that is, between end-Dec2022 and end-Sep2023), gold price in USD rose by just 2 percent, though gold price in INR moved up by 5.2 percent as INR depreciated against the USD. In the same period, AUM of gold ETFs increased by 10.9 percent. Despite the fears of a recession in the US and Europe and concerns surrounding Russia-Ukraine war, gold has not done well this year.
P.S.: Update dated 30Apr2023 with info on quarterly growth rates as at close of 31Mar2023 >
In the past three months (between 31Dec2022 and 31Mar2023), AUM of gold ETFs rose by 6.0 percent, as investors seem to be optimistic about gold as gold price in dollar rose by 8.6 percent during the first quarter of 2023. Against the increase of 8.6 percent in dollar gold price, NAV of Gold BeES rose by only 7.4 percent during the period.
P.S.: Update dated 13Jan2023 with yearly growth rates between Dec2017 and Dec2022 >
The below yearly growth chart shows how the metrics relating to gold ETF, gold price and USD-INR exchange rate have moved over the past five years, that is, between end of 2017 and end-2022.
Between 2017 and 2022, assets of gold ETFs grew by 342% (CAGR is 34.6%). Gold price in rupees rose by 90.8%, with a CAGR of 13.8%.
Interestingly, the net asset value (NAV) of Gold BeES ETF grew by 79.8% (CAGR 12.5%) -- which has failed to keep up with the 90.8% (CAGR 13.8%) rise in Indian gold price. This means, investors in gold ETF products will be unable to match the rise in gold prices -- the gold ETF returns are eaten by mutual fund expenses.
In addition, the chart provides yearly (calendar year) growth rates of these metrics. For example, assets of gold ETFs grew by 16.6% in 2022, whereas dollar gold price changed barely in the same period. In the past five years, the biggest growth in gold ETF assets occurred in 2020, with a growth of 146% -- driven mainly by rise in gold prices.
(please click on the image to view better)
P.S.: Update dated 13Jan2023 with info on quarterly growth rates as at close of 31Dec2022 >
In the past 12 months or year-to-date (between end-Dec2021 and end-Dec2022), assets of Gold ETFs grew by 16.6 percent. YTD, India gold price (IGP) rose by 14.1 percent, though dollar gold price (DGP) remained flat in the same period -- the rise in IGP is accounted for by the fact that the US dollar gained 11.2 percent versus Indian rupee in 2022.
The NAV of Gold BeES rose by 14 percent versus the 14.1 percent growth of IGP.
(please click on the image to view better)
P.S.: Update dated 23Oct2022 with new images with info as at close of 30Sep2022 >
In the past nine months or year-to-date (between end-Dec2021 and end-Sep2022), assets of Gold ETFs grew by 7.9 percent.
YTD, rupee gold price rose by 4.6 percent, though the dollar gold price fell by 8.9 percent. Why is that so? Because Indian rupee depreciated against the US dollar by 8.8 percent, pushing up the rupee gold price.
YTD, dollar gold price fell by 8.9 percent.
YTD, gold ETF net asset value (NAV) rose by only 3.9 percent though the rupee gold price rose by 4.6 percent. Why so? Because gold ETF returns are reduced by expenses charged by the mutual fund company.
P.S.: Update dated 08Jul2022 with new images with info as at close of 30Jun2022 >
In the past seven quarters, investors have practically got no returns from gold (in terms of gold price in India). The US dollar's appreciation against the Indian rupee by 7.0 per cent (between Sep2020 and Jun2022), nullified the effect of dollar gold price, which fell by 6 per cent during the same period--the net effect is a gain of just 0.8 per cent in rupee gold price. Ironically, investors continue to pump in more money into gold ETFs in India with the gold ETF AUM rising by almost 50 per cent in the past seven quarters.
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References:
Tweet 12Dec2020 - gold ETFs and high expense ratios
Tweet 12Dec2020 - gold valuation - gold ETF SID
Tweet 26Feb2020 - RBI manipulation of exchange rate
AMFI monthly data
RBI data DBIE - HBIE - Table 162 / Monthly price of gold and silver in domestic and foreign markets
IBJA Bullion rate - IBJA rates gold for past 60 days
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
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