There are several gold ETFs in India, and with the exception of Quantum – 1 unit of every gold ETF represents 1 gram of gold. If that’s the case then why does the price of these gold ETFs differ?
Shouldn’t they be exactly the same?
No, they shouldn’t, and before you get to the reasons why they shouldn’t – it’s important to understand that the last traded price of an ETF is not the same as its NAV.
Don’t compare the last traded price of one ETF to another
A gold ETF owns the following assets:
- Debt and other liquid instruments
The combined value of these assets divided by the number of units in the gold ETF constitute the NAV of the ETF.
The NAV of a gold ETF can be seen on its website, so you can see that the Benchmark gold ETF GOLDBEES had a NAV of 1975.26 on 13th December from their website.
However, since an ETF trades in the stock exchange and there is a different price at every tick the price of the ETF can be different from its NAV. The NSE website shows that the last traded price on that day for GOLDBEES was Rs. 1965.25.
This means that the ETF was going at a discount of about Rs. 10 at that point. There are big market participants who are engaged in actively trading the ETF to bring the market price closer to the NAV and gain from any arbitrage opportunities available.
I’ve seen a few people comparing the last traded price of one gold ETF to another, and concluding that the lower priced one is cheaper, but that’s absolutely wrong because the last traded price is largely dependent on the NAV, and the NAV is in turn dependent on the assets a gold ETF owns, so comparing one with the other does you no good.
A cheap ETF based on price will be one which is trading at a significant discount to its NAV, but the chances of finding that for a retail investor are really slim, so I won’t worry too much about it.
With that in mind, let’s look at the reasons why prices between various gold ETFs vary.
I’ve already touched upon the first reason which is the fact that ETFs are actively traded, so prices will differ due to the trading at that point in time.
All ETFs have expenses that are paid out by selling gold holdings or using the income from their debt holdings, so although theoretically one unit of a gold ETF represents a gram of gold – in reality the gold holdings are slightly lower due to the expenses. The higher the expenses, the lower would be the NAV, and consequently the trading price of the ETF.
A good example of this is the Reliance gold ETF which had a NAV of 1920.20 on 13th Feb 2011, and was trading at Rs. 1913 on that date.
Compare that to Benchmark GoldBEES price of Rs. 1965.20, and you might think that Reliance is cheaper than GoldBEES, but in fact the opposite is true because Reliance charges higher expenses than Benchmark!
Higher expenses means less lower returns for you, and a fund with lower expenses is better for you.
So, expenses eat into the NAV of the various ETFs, and affect their prices.
Composition of assets
Gold ETFs not only hold gold bars, but also debt instruments and cash for some liquidity, so that makes a difference to the NAVs of the different ETFs. I don’t know how much of a difference this factor makes, but I’d think this factor plays a larger role than active trading, but a smaller role than the expenses that are paid out.
These three factors contribute to the variation in the prices of the different ETFs, and if you are looking for a cheaper gold ETF then you should compare the expenses that different fund houses charge instead of the price at which they trade.
You should also check out my post on the best gold ETF to get a perspective on the factors you should consider before deciding on what ETF to buy.