Gold Prices Falling: 3 Gold ETFs With the Lowest Cost of Tracking Gold
Gold has had a rough autumn. Gold’s LBMA PM benchmark price reached US$5,120 an ounce on 24 February, and by 23 October spot gold was near US$ 4,016, roughly 21% lower.
This week alone it lost about 3.5%, its steepest weekly drop in more than four months, as rising oil prices pushed traders to expect that US interest rates will stay higher for longer.
In India, gold ETFs gave back about 6.8% in a month and about 3.3% in a week, yet they are still up about 13% over one year and about 31% per annum over three years.
For anyone looking at gold ETFs after a fall like this, the metal is only half the question. Every gold ETF in India tracks the same domestic price of gold, so the real difference between funds is how closely and how cheaply they follow it.
Among the 11 ETFs that have both a 3-year and a 5-year record, three stand out on returns and tracking error together.
Let’s look at each in detail.
#1 UTI Gold ETF
First on the list is UTI Gold ETF.
UTI is the only fund that sits in the top three on all three measures. It has the highest 3-year return (31.72%), the second-highest 5-year return (23.25%) and a tracking error of 0.29%, level with Quantum for the lowest of the 11.
Its tracking difference, the gap between the fund and gold itself, is only about 1.0% a year over one, three and five years, which is the most consistent of any fund.
| Metric | Value | Metric | Value |
|---|---|---|---|
| 3-year return | 31.72% (rank 1) | 5-year return | 23.25% (rank 2) |
| Tracking error | 0.29% | Tracking difference (3Y / 5Y) | -1.02% / -1.01% |
| Expense ratio | 0.50% to 0.59%* | Assets | Rs 44.06 bn |
| Rank total | 4.5 (best) | Latest NAV (23 Oct) | Rs 118.1 |
Data Source: Ace MF, Value Research
Across different periods, UTI’s gold fund has carried the lowest tracking error, so the record backs this up over time.
Its size, at Rs 44.06 bn, is also large enough or easy trading in most conditions, so liquidity is also not a constraint.
#2 LIC MF Gold ETF
Second is LIC MF Gold ETF.
LIC MF Gold ETF has the highest 5-year return of the 11 (23.47%) and the second-highest 3-year return (31.65%).
It also has the smallest tracking difference over five years, at -0.78%, and the second-lowest expense ratio, at 0.45%.
Its weak spot is tracking error. At 0.47% it ranks only joint ninth, which means its day-to-day path wanders more than UTI’s even though its long-run result is excellent.
| Metric | Value | Metric | Value |
|---|---|---|---|
| 3-year return | 31.65% (rank 2) | 5-year return | 23.47% (rank 1) |
| Tracking error | 0.47% | Tracking difference (3Y / 5Y) | -1.10% / -0.78% |
| Expense ratio | 0.45% | Assets | Rs 14.41 bn |
| Rank total | 12.5 | Latest NAV (23 Oct) | Rs 126.54 |
Data Source: Ace MF, Value Research
The main question is size. At Rs 14.41 bn it is the third-smallest of the 11, and smaller funds can have wider gaps between the exchange price and the fund’s NAV.
So if you’re investing in this one, checking the bid-offer gap on the exchange before placing an order would be sensible.
#3 Invesco Gold ETF
Last is Invesco Gold ETF.
Invesco India Gold ETF is the steady third. It ranks third on the 3-year return (31.42%) and third on the 5-year return (23.16%), with a tracking error of 0.45% and a 5-year tracking difference of -1.12%.
| Metric | Value | Metric | Value |
|---|---|---|---|
| 3-year return | 31.42% (rank 3) | 5-year return | 23.16% (rank 3) |
| Tracking error | 0.45% | Tracking difference (3Y / 5Y) | -1.38% / -1.12% |
| Expense ratio | 0.50% | Assets | Rs 7.54 bn |
| Rank total | 14.0 | Latest NAV (23 Oct) | Rs 122.08 |
Data Source: Ace MF, Value Research
The caveat with this fund is again size: Rs 7.54 bn is the smallest of the 11 funds.
Here’s how all three compare with each other, along with the largest and most liquid ETF of Nippon.
| Fund | 3-year CAGR | Rs 1 lakh after 3 years | 5-year CAGR | Rs 1 lakh after 5 years |
|---|---|---|---|---|
| UTI Gold ETF | 31.72% | Rs 2,28,518 | 23.25% | Rs 2,84,428 |
| LIC MF Gold ETF | 31.65% | Rs 2,28,147 | 23.47% | Rs 2,86,961 |
| Invesco India Gold ETF | 31.42% | Rs 2,26,992 | 23.16% | Rs 2,83,358 |
| Nippon India ETF Gold BeES | 31.06% | Rs 2,25,119 | 22.87% | Rs 2,80,060 |
Gold ETFs are backed by physical gold of 99.5% purity and track the same benchmark, the domestic price of gold. So returns differ only by how much each fund loses to costs and tracking.
Snapshot of All Gold ETFs
Here is how all 11 funds ranked.
| Rank | Fund | 3Y CAGR | 5Y CAGR | Tracking error |
|---|---|---|---|---|
| 1 | UTI Gold ETF | 31.72% | 23.25% | 0.29% |
| 2 | LIC MF Gold ETF | 31.65% | 23.47% | 0.47% |
| 3 | Invesco India Gold ETF | 31.42% | 23.16% | 0.45% |
| 4 | Quantum Gold ETF | 31.39% | 23.06% | 0.29% |
| 5 | Aditya Birla SL Gold ETF | 31.38% | 23.11% | 0.41% |
| 6 | ICICI Pru Gold ETF | 31.40% | 23.15% | 0.47% |
| 7 | Kotak Gold ETF | 31.29% | 23.07% | 0.38% |
| 8 | HDFC Gold ETF | 31.22% | 23.03% | 0.39% |
| 9 | Axis Gold ETF | 31.31% | 23.08% | 0.75% |
| 10 | SBI Gold ETF | 31.15% | 22.95% | 0.43% |
| 11 | Nippon India ETF Gold BeES | 31.06% | 22.87% | 0.41% |
Apart from these, there are 13 other gold ETFs with no 3-year or 5-year return yet, and two more, DSP and Mirae, with only a 3-year figure. Among them are funds from Groww, Zerodha, Motilal Oswal, Tata and Union. Without a track record we cannot test them on the 3- or 5-year returns.
Conclusion
Before investing, do remember that gains on gold ETF units kept for more than 12 months are taxed at a flat 12.5%, with no indexation. Gains within 12 months are added to income and taxed at the slab rate.
Since the return gap between funds is under 1 percentage point a year, taxes and brokerage can matter as much as the choice of fund.
Apart from this, here are few key things to watch if you’re planning to invest in gold this festive season:
– US Federal Reserve: the 27 and 28 October meeting, and whether the roughly 75% to 80% odds of a December rate rise stand.
– Oil prices: the rally to a five-month high drove last week’s drop in gold, so a reversal could ease the pressure.
– Trading gap: check the difference between the exchange price and NAV.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
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