Why do different Gold ETFs have different prices?

by Manshu on February 15, 2011

in ETF

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:

  • Gold
  • Debt and other liquid instruments
  • Cash

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.

Active trading

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.

Expenses

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.

Conclusion

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.

{ 21 comments… read them below or add one }

S.Raja sekhar Reddy February 19, 2011 at 3:52 am

1. Please suggest me which is the best ETF ?
2. If the NAV of that particular ETF is less, does it mean that the gold price of that particular ETF is cheaper and do we get more returns from them.

Reply

Manshu February 20, 2011 at 5:18 pm

GOLDBEES is one of the better gold ETFs in my opinion. There is a post here on that too. If you search for best gold ETF you will read that.

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S.Raja sekhar Reddy February 19, 2011 at 3:58 am

Are NAV and returns inversely proportional?

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Manshu February 20, 2011 at 5:18 pm

No, no, no absolutely not!!! They have nothing to do with each other. That’s the whole point of the post you’ve commented on….didn’t you read it?

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dynamite February 24, 2011 at 6:04 am

Very informative article especially about NAV vs. active price of an ETF.

In general, people buy gold as a hedge against stock prices and inflation. So, my view is that one factor that should come into play while selecting a Gold ETF is that the company whose ETF you are buying should itself be stable. In case of economic downturn, if the company itself goes down under, your “safe” investment too would be in danger.

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Manshu February 24, 2011 at 7:20 pm

The only thing I’d like to add here is that the physical gold is audited so there is that bit of additional protection, but not as if we’ve never had a fraud before.

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BUY eGOLD & eSILVER February 27, 2011 at 10:10 am

I would like to add a very important factor to the above discussion. Though it is mentioned here that “one unit of a gold ETF represents a gram of gold” but if someone reads the wording carefully, they will find that it is mostly mention as ” approx a gram of gold”

In fact, most investor tend to believe that ONE UNIT of GOLD ETF is equivalent to ONE GRAM OF PHYSICAL GOLD, which is NOT TRUE. Moreover they tend to invest between 0-90% of their fund in Gold assets and still upto 10% in other asset class to try for better than gold equivalent returns, but it is just not happening.

We would, based on main inputs mentioned herein above, would always suggest to invest in direct Gold and Silver underlying investments like E-Gold and E-Silver which are traded on the exchange and has direct relation to PHYSICAL GOLD AND SILVER.

Gold ETF was better investment when E-Gold and E-Silver option was not there. May be in future, someone comes up with still better option that this, who knows. We need to update and move on with new and better options.

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Manshu February 27, 2011 at 2:32 pm

GOLDBEES actually holds 99.96% in gold and 0.04% in other assets.

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Loney February 28, 2011 at 8:43 am

I would like to contradict on your point that GoldETFs invest upto 10% in other asset classes to try for better than gold equivalent returns.

All ETFs have two parts, the assets they track/represent (stocks forming SENSEX or NIFTY / gold) and the second part is cash. Cash is an important part in any mutual fund because ETFs cannot deduct their asset management fee / brokerage and other expenses directly by debiting to gold/stocks. So, by holding about 1-2% in cash, they can debit expenses and fees to this cash account. You can see that their intention is not to create returns superior to the asset they track.

In important issues like transparency, ETFs are certainly superior.
There are many issues with NSEL
1. What are the volumes / liquidity?
2. What is the Auditing requirement?
3. How do they debit charges?

My personal choice : GoldETFs

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BUY eGOLD & eSILVER February 28, 2011 at 12:22 am

Thanks Manshu for this information. Still it is better, for the investor out here, to let them know about other Gold ETF

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Manshu February 28, 2011 at 9:05 am

As far as I know there is not one Gold ETF that holds only 90% gold as its underlying. Why don’t you point out which gold ETF holds 10% of other investment as you say in your original comment?

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Loney February 28, 2011 at 9:13 am

Exactly!
As I have mentioned in another reply in the same post, ETFs hold only 1-2% of their assets as cash to meet expenses/fees. No ETF holds 10% n cash or any other asset.

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Loney February 28, 2011 at 9:29 am

Also, that NSEL is self-regulatory in nature. Since it is not regulated by an external regulator, who should we approach in case of grievance?
In my opinion, the risks associated with any self-regulated organization is more than an actively regulated organization.

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Satyajit March 15, 2011 at 3:53 am

Very informative!!
Sir, i was thinking of going for the Kotak Gold ETF NFO……. kindly advice… also, how do i get the info regarding the expenses of the ETF????

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Manshu March 15, 2011 at 4:52 pm

Kotak’s new offering is a gold mutual fund that will own underlying Kotak Gold ETF, so in that sense it’s not an ETF but a gold mutual fund. You can read my views on Reliance Gold Mutual Fund (similar product) to know what I think about it.

http://www.onemint.com/2011/02/17/thoughts-on-reliance-gold-mutual-fund/

As far expenses – they are published on the individual websites, and also available on sites like Value Research.

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sailaja May 9, 2011 at 10:49 am

i want to invest for long term in gold etf. is hdfc gold etf safe. what are the charges and returns on it

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Manshu May 9, 2011 at 11:01 am
Zohaid June 10, 2011 at 4:12 pm

hii….if ETF is like trading shares (which do not require fund managers), then how come there are fund managers for Gold ETF’s. In that case if fund managers choose to allocate asset according to their wish & not completely (100%) into physical gold then how any ETF say that it purely invests in gold..??

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Arvind October 10, 2011 at 5:47 pm

Dear all –

I have ICICIDIRECT Trading account and I am looking for Best SILVER ETF Option.

I am interested in investing in Online Silver – Which Option is good and what is Stock Code.

Thanks in advance – Arvind.

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Manshu October 11, 2011 at 5:22 am

There is no silver ETF listed in India Arvind. You can look at NSEL’s E Silver but then that will require a new Demat for specifically that. You may also look at international silver ETFs if those are enabled from your account but I’m not sure how they work since I have never invested in those myself.

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hemanth kumar October 28, 2012 at 9:39 pm

hi sir..
i have opened a demat account in sbicap securities.. i want to take gold etf, i hav nill knowledge in this. can u sujjest me which one can i take. i am willing ti invest mnthly 3 to 5 thousand. thank you..

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