Mysterious: Gold ETFs lag e-gold, gold funds

Mysterious: Gold ETFs lag e-gold, gold funds

Returns on gold exchange-traded funds (ETFs) have been trailing those on other forms of non-physical gold investment, such as e-gold and even gold mutual funds, belying the long-held perception that they are the superior option. In the last one year, gold ETFs have given a return of 8.36% compared with 11.3% for e-gold and 9.5% for gold funds. Sure, e-gold is cost-effective — it does not involve recurring expenses like management fee. E-gold, as the name suggests, is an electronic form of gold investment for which one needs to open a demat account with any of the depository participants of the National Spot Exchange. It is the most cost-effective form and is able to mimic the gold prices more closely than ETFs or gold funds. Still, the 350 basis point difference over gold ETF returns — and a difference of over 80 bps over physical gold, where the one-year return was 10.53% at Mumbai prices — is difficult to understand. As such, e-gold loses out to gold ETFs when it comes to taxation — these units need to be held for more than three years in order to get long-term capital gain tax benefit, unlike gold ETFs which need to be held only for over an year. Also, one may have to pay wealth tax on e-gold, unlike ETFs or gold fund. “The difference should not be more than 150-200 bps as a gold ETF mimics the bullion prices very closely,” said an analyst at a leading brokerage house, requesting anonymity. More curiously, ETFs have even underperformed gold funds. Gold ETFs are passively managed funds that track gold prices. The expense ratios of these funds are lesser than most other mutual funds and hence, the returns are expected to be as close to the underlying asset. These are mutual funds that invest in the same asset management company’s gold ETFs. They do not require a demat account to be maintained and are therefore easier to invest in compared with ETFs or e-gold. However, there involve two expense ratios – their own fund management expense as well as of the ETF they invest in. Hence, theoretically, their returns cannot exceed those of the underlying ETFs. And yet, all the gold funds have given higher returns than their underlying ETFs. What gives? DNA Money contacted more than 10 analysts to understand the reason. None was sure what had caused the underperformance. Some of them reasoned that the difference may have arisen due to the cash-holding in a fund. But even in gold funds, where over 99.8% of the money is invested in ETFs, there is still a difference of about 200 bps in returns. Sundeep Sikka, CEO of Reliance Capital Asset Management, said the gap may be because gold funds allow an individual to invest via the systematic investment plan route. As the fund invests large chunks of money on different days, the discrepancy in returns appears to be creeping in. But other analysts do not buy this explanation. “This can’t lead to a difference of over 2 percentage points. Even other factors like, say, a tracking error may contribute (to the gap), but still that does not explain the 200 bps divide, “ said another commodity analyst.