Gold ETF Meaning:
Gold ETFs are units which represent physical gold that may be in a paper or in a dematerialized form. These units are traded on exchange just like a single stock. Gold ETF is a commodity ETF which consists of only one asset i.e. gold.
What is Gold ETF?
Gold ETF funds are basically more simple and convenient way of owning physical gold. Acquiring and storing physical gold (gold bullions or bullion coins), an investor can easily purchase units of ETF which has gold as an underlying asset in it. This will help you to invest in gold without the hassles of storing and securing it from theft. Gold ETFs have a clear linkage with the physical gold as the value of the ETF units’ move in the tandem with the global gold prices.
The funds hold gold derivative contract which are backed by gold. So if an investor invests in Gold ETF they do not actually owe any gold, also while redeeming it they do not receive any precious metal; an investor will be receiving the cash equivalent.
As the assets in funds are backed by commodity therefore the intent is not for investors to own gold but it gives investor an opportunity to gain exposure to gold (price movements and performance). Gold ETF are used by investors to track and reflect gold prices.
Gold ETF is an open ended MF scheme which is based on the ever fluctuating cost of gold. It is an investment which helps in beating inflation in long term. Gold is a less volatile asset when compared to equity. One gram of gold is equal to one gold ETF, therefore giving dual benefits to the investors of stock trading and gold investment at the same time. As price of gold rises, the value of gold ETFs also rises and vice versa.
How to use Gold ETF?
Investors use gold ETF to hedge against political as well as economic disruptions and for currency debasement. When the dollar is weak, gold tends to rise, so if the investment portfolio of any investor holds assets that have a risk exposure to the dollars downside, buying gold ETF may be a great help to hedge that exposure. On the other hand, selling of gold ETF can act as a hedge if investment portfolio has exposure to the upside.
Gold ETF can be used to hedge gold commodity risk or gain exposure as it is a commodity exchange traded fund to the fluctuation of gold itself. If any investor has increased risk on his/her investment portfolio assets when gold prices rises, purchasing a gold ETF can help to reduce risk in that position.
Gold ETF is a commodity ETF though it can act as an industry ETF as well. Any investor who wishes to gain exposure to gold mining industry owning a gold ETF can be use this as an investment strategy to fit in his/her portfolio.
How Gold ETF works?
As a security at the backend, physical gold supports gold ETF, like when any investor buys gold ETF the investor at the backend is actually purchasing gold. Investors are given the guarantee about the purity of the gold too. They meticulously follow the latest market cost i.e. the spot prices of gold.
National Stock Exchange (NSE) allots an authorized participant or a member who handles the purchase and sale of the gold in order to generate ETFs. These are mostly the large companies.
Difference between Gold and Gold ETF
|Gold is an idle wealth||Gold ETF is an investment|
|Gold is for personal use or used as a loan collateral||It is used for short term or long term financial goals|
|High risk of theft||No risk of theft|
|Gold is subjected to market rate fluctuations||It has same value as gold|
|These are directly bought from shop in physical form||These are traded on stock exchange|
|Making charges are higher||Fund management expenses i.e. expense ratio|
Features and benefits of Gold ETF
- Smaller domination
- Ease of participation in the gold market
- Easy to hold for a long period
- Tax efficiency
- Use of NSE exchange platform
- Ease of transaction
- Cost effective
How to invest in Gold ETF?
- Open a demat and trading account
- Login with your credentials
- Select gold ETF and place your order. There is also an option of choosing MF with an underlying gold ETF
- After order confirmation, you get a notification in your registered mail ID and phone number
Gold ETF Returns
|Fund||Return in 1 year||Return in 2 year||Return in 3 year|
*The above values are as on date 26th Aug, 2019 (Source: Value Research)