This is a very common question here, and a lot of people are confused about what you need to do if you want to buy a gold ETF. An ETF trades like a share in the stock exchange, and if you want to invest in an ETF – you can buy it from your share broker.

It doesn’t matter that this ETF is a gold ETF – it’s all the same – you can still buy it from a share broker. You will be charged the same commission that is charged when you buy any other share, and you will continue to hold it in your Demat account.

You don’t need a separate Demat account or a trading account with the commodities exchange or anything like that – just your regular share trading and Demat account will do.

How to buy a gold etf

The difference comes in the way shares are taxed and gold ETFs are taxed. For starters, you pay Securities Transaction Tax (STT) on share transactions but you don’t have to pay that on gold ETFs.

Capital gains are also treated differently – shares attract a short term capital gains of 15% whereas short term capital gains on gold ETFs will be added to your income and then taxed according to your slab.

Long term capital gains are tax free for shares, but you will have to pay 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess in the case of gold ETFs. Gold ETFs are still more tax efficient than holding physical gold.

So, in conclusion – as far as buying and holding of a gold ETF is concerned – it’s exactly like a share, but the tax treatment is different.

It has been over a year since I wrote my best gold ETF in India post, and since then the number of gold ETFs that are present in India have almost doubled.

There are a total of 11 gold ETFs currently present in India, and 4 out of these 11 were launched within the last year. The big change in this space has been the reduction in the expenses that sponsors charge their customers, and now you can see that almost all of them are on the same footing.

You will still see some performance difference in them because every gold ETF holds a small sum of liquid investments other than gold, and that makes a small difference on their returns.

In this post I will look at the performance, volumes, and expense ratios of all the gold ETFs currently traded in India. I couldn’t find the expense ratios of some of these funds, and instead of waiting out I have published this post now, and will update it as and when I find the information.

First up, here are the names, NSE symbols, 1 year returns as on August 12 2011, and their turnover on the same day.

Regular readers know that every gold ETF in India holds physical gold equivalent to the number of units that are issued in the market, and their price is thus dictated by the price movements of gold.

Since all these ETFs have the same underlying asset, the price movement is also quite similar.

Here is a chart that gives you a better visual of the performance in the last 1 year. Some of these funds are less than a year old, and that’s why you don’t see any corresponding data against their names.

Gold ETF Returns for 365 Day Period Ending Aug 12 2011

From this chart, you see that the performance are pretty close although Benchmark Gold BeES has done the worst this time period, and Religare has done the best.

When I last looked at this type of data – GoldBeES had done better than all other competitors for a 2 year period, but in the last year everyone else has done better than them.

I took a look at the 2 year performance to see if that confirms this or not. Here is how the 2 year returns chart looks like.

Gold ETF Returns for 2 Year Period Ending Aug 12 2011

This chart shows a different result from the first one, and to my mind – this goes to show that there is very little difference in terms of these funds performance wise.

Next up, I wanted to see what the expense ratios were like, and how much each fund was charging its customers for maintaining the fund. The tricky part here is that each fund lists down the expenses it will charge in its offer document, and then revises these charges periodically. The revised rates should be found on their website because the offer document itself is not revised, and that still contains the old rates.

When you see blanks in this table that means that I couldn’t find the updated expense charges on their website, and didn’t want to use what’s given in the scheme information document.

Here is the chart that shows that information.

Finally, let’s take a look at the volumes of these gold ETFs because you want your fund to be as liquid as possible so it isn’t impacted by what a few big players may do. The higher the volumes, the better it is.
Here is a chart that shows the turnover of all these funds on August 12 2011.

Gold ETF Turnover in Lacs on Aug 12 2011

This is where you see the staggering difference – Benchmark is just way more popular than anyone else, and a lot of that is due to the fact that they were the oldest gold ETF, and even when they had very little competition – they kept their expenses low, and gained in popularity with investors.

Conclusion

It has been interesting to see this space evolve over the years, and see so many competitors come in, which is always good for the customer. I’m fairly certain the expenses wouldn’t have come down to 1.00% without Benchmark setting that precedent and other companies coming into the space and competing. It feels just a matter of time when someone lowers the expenses to less than a percent, and market their fund.

About the choice of funds themselves, although the performance data doesn’t suggest a clear winner – the volume data shows Benchmark and Kotak to be clear leaders of the pack.

I wanted to compile a list of Indian ADRs in the US as soon as I did my post on the performance of Indian ETFs listed in the US because I wanted to see if there are enough individual ADRs that someone in the US can buy to get enough exposure to India, and be fairly well diversified as well.

I found that there are only 14 Indian ADRs listed in the US, and a lot of them are not doing very well. Further, they are heavily concentrated in the software, and telecom services sector.

If you wanted to get exposure to India, then I’d say an ETF like INDY is much better than picking a few stocks from the universe of Indian ADRs available to you.

The ADR options are just very limited.

Here is a list of Indian ADRs available in the US along with their ticker, the exchange they are listed in, and the industry they operate in.

These are the only Indian ADRs that I could find, and if you feel that there are some that I have missed, please leave a comment and I will update my post.

I guess it was only a matter of time before this product was introduced. Muthoot Finance, which is India’s biggest lender against gold has said that they are going to start lending against gold ETFs too.

This was reported by several newspapers last week, and it’s a fascinating development in the gold ETF world. The first thing that came to my mind was that they can’t be worried about fraud at the ETFs if they are willing to accept that as a collateral instead of physical gold.

The second thing was didn’t someone recently ask about something like this?

About 3 or 4 weeks ago someone had emailed and asked if it was advisable to take a loan against gold, and then buy more gold with it because gold can only go up, right?

My predictable response was that it was a bad idea, but until today I hadn’t realized how bad it was. The Muthoot website shows that currently you can borrow Rs. 1,100 per gram of gold at an interest rate of 12%.

I don’t think it makes any sense at all to borrow at these rates with this little for the purpose of trading in gold! I can understand someone feeling the pinch, and having to pledge their gold to get money, but for trading? I don’t think so.

Business Standard reports that Muthoot is going to allow you to get up to 85% of the gold ETF value for a loan of up to 3 years at a diminishing interest rate of 24%.

I think they might have other options as well where they allow you to take a lower amount for your ETF, and charge a lower rate of interest, but even those should be comparable to the gold loan interest rates, and therefore will be bad to borrow and trade with.

I can understand that gold loans are an important way for some people to tide over rough times, and this will only broaden the options available to such people, and while that makes absolute sense to me; I can’t see this being a good way to leverage up, and trade in gold.

But I know for a fact that a lot of the lending will happen to trade, and especially if everything can be done online. If people have to take print outs of Demat statements, and fill up forms etc. then that acts as a bit of a deterrent and ETF loans for trading may not catch as much appeal as margin trading does, but if it is all online then that is more encouraging.

What happens only time will tell, and hopefully it will prove that I’m being unduly skeptical.

Image by Hair Flick

Continuing with the theme of ETFs this week, today I’m going to write about something that doesn’t impact Indian investors yet, but will surely impact them in the years to come.

Currently, the name of the ETFs pretty much lets you know what it means and there’s not much difference between different ETFs of the same category – for example you can look at the performance of any gold ETF over a certain period of time and find that all of them were fairly close in their performance.

This is because their underlying is the same and all of them buy the same gold, and it’s price movement is the same for everyone.

However, this won’t remain the same forever, eventually there will be fund providers who will create a gold ETF that doesn’t actually own physical gold but only replicates its performance by buying Futures contracts, and there may also be gold ETFs that own shares in the companies engaged in gold mining, trading or dealing with jewelery.

For example – I took 4 oil ETFs that trade in the US market, and saw how they performed in the last year.

You will be amazed to see the variance in performance of these funds. While the best performing went up by about 50%, the worst performing went by just 22% or so.

OIH is a fund that invests in oil producing companies whereas USO is the ETF that tries to replicate the performance of oil with Future contracts.

The lesson here is that even though you’d think of both these ETFs as oil ETFs, the performance between them varies a lot, and before buying into any ETF you need to see what they are going to buy, and then keep an eye on how the fund is performing relative to its peers.

The big question here is how to know which fund will perform well without the benefit of hindsight, and apart from looking at a fund and finding consistent patterns I can’t think of anything else. This is probably another case where you can spread your investment between funds of different kinds and diversify a little.

Arif commented on yesterday’s post that I had misinterpreted the question, and it was in fact a question about variety of ETFs, and not Options on ETF.

I don’t know if I misinterpreted or not, since Amruta who originally posted the comment hasn’t responded yet, but I think that the question of which new ETFs should be introduced is an interesting one, and I’ve often thought about this.

Here is a list of 7 ETFs that I’d like to see launched in the Indian market. Apart from the silver ETF, I haven’t ever read about anything else being considered so think of these as just my wish-list, and not something that’s likely to be launched in the near future.

1. Silver ETF: There’s been a lot of interest in silver for the last year or so, and I think this is one ETF that a lot of people want. Like the gold ETFs, this will hold physical silver and will be like SLV that trades in the US.

2. Oil ETF: There are no oil ETFs in India, and I think this will also be a good product that will give people exposure to oil. It will be good if the oil ETF actually owned oil barrels, but I don’t know of any oil ETF in the US that does it, so I don’t know how feasible it will be to launch such an ETF in India.

3. Copper ETF: People say copper has a PhD in Economics since it tracks the economy so well, and I think this will be a good ETF as well. I’d like this to be similar to the gold ETF, and own physical copper instead of just owning stocks that engage in copper mining.

4. Canada ETF: I’ve always felt it strange that most of the international ETFs and mutual funds in India track other emerging countries and not developed countries. The stocks of developed countries are less volatile and have the scope of offering diversification to Indian investors who have to deal with a lot of volatility in their domestic market.

5. Germany ETF: Reasons are similar to the Canada ETF, and this is a developed and probably the strongest European country of the day. It may be a good idea to get exposure to this.

6. Australia ETF: In addition to being a developed country – Australia is big on natural resources, and a natural beneficiary of China’s rise, and this might be a good asset to own in the future.

7. INR – USD ETF: There are no currency ETFs right now, and this can be another area that can be useful for people, especially those who are invested in stocks abroad, and want some currency exposure as well.

So, this is my wish-list and some of the ETFs that I’d like to see in India; what about you? Which ETFs would you like to see launched in India?

This is another post from the Suggest a Topic page, and it’s about Options trading on ETFs, or rather the lack of ETF Options in India.

Here is Amruta’s comment.

ETF Options are widely traded in US markets. Would like to know ur take on their introduction in Indian markets? which etfs should they b introduced on?? Thanx..

I feel that it’s only a matter of time when Options are introduced on ETFs in India. In fact a few months ago there were plans to create Options on the popular Benchmark Gold BeeS ETF on NSE, but then the FMC (Forward Markets Commission) wrote to the NSE (National Stock Exchange) saying that they should have jurisdiction over Options trading on the commodity based ETF since they already regulate commodities future, and this is quite similar to that product.The launch was then stopped, and since then I haven’t read anything on the matter, but I think this will happen in due course, and after that Options on other ETFs will be launched as well.

I think that it’s good to have Options on these ETFs, as it allows people who are so inclined to take positions and test out their theory.

I have no doubt that a lot of people will lose money in trading Options, but that is no different than trading in stocks, and I’m sure there will be people who make money on them as well.

It also allows you to take short positions which you can’t do without Options. For example, currently, there are no easy ways for small investors in India to take a short position in gold if they’re so inclined but if there were Futures and Options on Gold BeeS they could have sold a Future or bought Puts.

Compare this with the US where a small investor can easily buy long dated Puts on either the popular gold ETF GLD, or even gold mining companies like ABX, and I feel that the Indian investor is at a disadvantage.

Options are not for everyone, but there is a segment of investors who understand these products, can use them, and even eagerly awaiting them, and I feel that it’s only a matter of time before which their wish is granted.

I first came across the concept of investing in fishing related themes on Roger Nusbaum’s blog a few days ago when he wrote about Global X launching a fishing ETF.

Global X has launched the first global fishing ETF in the US a couple of weeks ago.  The FISN Global X Fishing Industry ETF trades on the NYSE Arca and it has around $3 billion in assets already!

Though Indian investors don’t have access to this ETF, I thought I’d write about it since it’s an interesting theme, and it’s good to be aware of such themes before (if at all) they become red hot. As you may imagine this type of fund draws extreme reactions from people. They either think it’s downright silly, or they think it makes perfect sense, so far I haven’t seen a lot of people in the middle.

It’s easy to see why someone may think this is a silly theme, so let me dwell on why people think this makes sense. The idea is that as a large number of people around the globe move to higher incomes and demand protein rich food – fishing related companies will be one of the beneficiaries of the trend.

To take advantage of that – FISN tracks the Solactive Global Fishing Index and the aim of the index is to track the performance of large global companies engaged in the fishing industry.

The index has 20 constituents out of which 18 companies are based outside the US. The index contains a mix of emerging and developed countries, and Norway and Japan are the two largest country components of the index.

Here is the weight of various countries in FISN.

FISN Country Weights

As you can see, Norway and Japan form more than half of the index constituents, and the USD – YEN or USD – Norwegian Krone currency rate movement will seriously impact how the fund performs.

Currency rate movements can have significant impact on ETFs that invest in foreign stocks as we saw in the case of INDY (iShares S&P India Nifty 50 Index Fund) which outperformed its underlying index by quite a bit because favorable exchange rate movement.

Next, let’s take at the top 5 companies that companies that form part of this index.

The fund has an expense ratio of 0.69% so not very highly priced either.  In summary, the fund has a lot of international stocks that are large companies in the fishing sector.

I have absolutely no clue how this will do in the future, but I think this is a very interesting theme, and one that is at least sure to capture the imaginations of people if not provide them good returns.

It’s also the kind of thing that people enjoy telling others that they invested in, so that may be another reason why the fund has grown in size so rapidly.

What are your thoughts? Do you think it silly or does it make sense to you?

This post is about ETFs listed in the US that allows American investors to invest in India. There are currently 7 such India ETFs, and the biggest among them is Wisdom Tree’s India Earnings Fund (EPI), which is over 3 years old and has assets worth about $1.5 billion.

Powershares India Portfolio (PIN) is the second largest with over half a billion worth of assets under management.

You can take a look at all the seven India ETFs and see how they performed in 2010 in the table below.

(1 Year returns and dividend data taken from Google Finance)

The Direxion ETFs are leveraged ETFs that aim to give you double the daily returns of their index, and by their very nature are not suited for long term investing.

The Emerging Global Shares ETFs focus on small cap and infrastructure in the Indian space, and are only suitable if you want to bet on these specific areas of the market.

That leaves us with three funds – EPI, PIN and INDY that an investor can look at if they want to invest in the broader Indian market.

Large overlap among India ETFs

The interesting thing about these funds is though they follow different indices there is a big overlap in terms of their top holdings and the sectors they invest in.

You can see how they share their top holdings from the chart below.

These holdings are as on April 20 2011.

The holdings change for these funds but you can see that they do share a lot of common stocks and though the percentage varies, with the exception of SBI – all three have relatively big stakes in the same company.

Despite, this INDY has done much better than the other funds, but it’s anybody’s guess if it will continue to do so.

INDY’s performance made me look at how it performed against the index it was supposed to track and I was surprised to see the following chart.

INDY vs Nifty

As you can see INDY has beaten it’s underlying index by quite a margin!

I think this is because INDY has benefited from USD – INR exchange rate movement in the last year and while their holdings must have lagged Nifty performance by a bit (due to expenses) the currency movement has juiced up their returns and made them do better than their underlying index itself.

Conclusion on the Best India ETF

For most foreign investors – the larger question is probably whether you want to bet on the Indian market or not, but once you’re done making that decision – these 3 funds give you a good exposure and it’s hard to pick one over the other.

Personally, if I had to invest in an India ETF – out of the 7 currently present in this space – I would opt for INDY because it tracks a popular Indian index, comes from a well known fund provider, has low expenses, reasonable volume size, and has done a good job of tracking its index as well.

Disclosure: No investments in any ETF mentioned here.

This is another post from the Suggest a Topic page, and this time we’re going to take a look at the recently launched MOSt Shares NASDAQ 100 ETF from Motilal Oswal.

The NFO for this ETF has recently closed on the 23rd March 2011, but regular readers know that it doesn’t make any difference if you missed the NFO.

The MOSt NASDAQ 100 ETF plans to track the NASDAQ 100 Index  (NDX) of course, and this isn’t a fund of funds, which means that it will look to invest in the underlying stocks directly, and you won’t have to incur double fees.

The few other international funds I’ve seen so far are fund of funds which means double fees for investors as they bear the fee of the fund, and then the underlying fund as well.

While the SID (Scheme Information Document) does state this ETF can invest in other NDX based ETFs, it appears to me that for the most part the intention is to directly invest in the underlying stocks, and that’s a good thing.

The expense ratio of MOSt NASDAQ 100 ETF is 1% of recurring expenses, and that’s among the lower ones charged in the Indian ETF space, which is a good thing as well.

Having looked at the basic things, let me now explore 3 factors that are not easily apparent when you’re looking at this ETF, but are something that you should be familiar with.

The NASDAQ 100 Index

The first thing to do is to get familiar with the index itself. In this case the NASDAQ 100 Index, which comprises of 100 of the largest companies listed on NASDAQ based on market capitalization.  These are primarily technology companies, but there are other companies like Vodafone, Whole Foods, Wynn Resorts in the index as well. The complete list can be found at the bottom of this post which I’ve taken from the SID itself.

Apple is by far the biggest constituent of this index with about  20.65% weight, and QUALCOMM is the second largest constituent with 5.03% weight.

Here is a pie chart that shows the top constituents along with their respective weights and you can see that the top 12 stocks make 50% of the index.

NASDAQ 100 Components

So, if I were to invest in this index I’d have to have a good feeling about the US technology market in general and these stocks in particular – at least about Apple.

Exchange Rate Movements

Since this ETF will raise money in INR and then invest it in USD – that exposes it to exchange rate fluctuations, and this is something you need to keep in mind or it might surprise you later.

From the risk factors in the SID:

As the Scheme will invest in securities which are denominated in foreign currencies, fluctuations in the exchange rates of these foreign currencies may have an impact on the income and value of the Fund.

To understand this think of a situation where this ETF didn’t exist and you wanted to invest Rs. 90,000 in the NASDAQ 100 Index.

You’d give this money to your cousin in US and ask him to invest it on your behalf. The current exchange rate is about 45 rupees to a dollar, so this will amount to approximately $2,000 with which your cousin buys the ETF.

Let’s suppose the market stagnates for a year, and the NASDAQ 100 doesn’t move at all. Your patience runs up, and you ask your cousin to sell the holding and send you the money.

Your cousin sells the holding and gets the $2000 back, but the exchange rate has now moved to 1 USD = 40 INR, so that $2000 only translates to Rs. 80,000.

So even though the index didn’t move at all you made a loss due to exchange rate movement. The reverse is also true and if the exchange rate moves to 1 USD = 50 INR you will stand to gain.

This will be true for any international ETF and is more of a feature than a bug. Just be cognizant of this factor when investing in the MOSt NASDAQ ETF.

Taxation

This ETF is treated as a scheme other than an equity oriented fund for taxation purpose, and that’s probably a drawback given that equity funds are treated more favorably for tax purposes, and your investment really is equity investment.

Conclusion

This is an interesting product, and the people I’ve spoken to who’re interested in this product were primarily looking to diversify their equity holdings a little bit by investing in the equity of a developed market. If that’s your goal with it then I suggest that you also enable foreign trading on your equity account and see what options you have there. I’m not very well familiar with that option, but it does exist. If you were inclined to take a position on US technology stocks then of course this is a fit for you.

As always – I won’t make any recommendations on whether you should buy it or not, but if you had any other questions or observations please leave a comment.

List of all components: