Make your portfolio precious with gold, silver ETFs

“Gold and Silver have always had value, never gone to zero. Can you say the same about stocks and bonds?” Words of Economist Mark Skousen are no different from our grandma’s.
The wisdom of grandmas has proved to be prophetic. From Akshya Tritya of 2003 to 2023, silver prices have jumped nearly 900%, gold has given a whopping 4-figure return of 1000% during the same period. From Akshya Tritya of 2022 to Akshya Tritya of 2023, on the MCX gold has given 18% return, and silver 19%. Market is expecting gold to hit Rs 65,000/10 gm and silver Rs 80,000/kg in 2023.

Why one should invest in gold & silver in 2023?

Both the commodities do well in a low growth/ recession scenario, as is expected this year. Gold and silver are a potent hedge against inflation, and thus prevent erosion of wealth. Gold is inversely related to the equities, thus in a bearish market, like the one we are witnessing, gold gives better returns. Silver, because of its industrial use, does well even in bullish markets. Lastly, it will take few months to a year for equities to bounce back after the interest rates stabilise globally. Thus, gold & silver are expected to give good returns in the near to medium-term.

In this backdrop, it’s amply clear that there’s lot of opportunity to get decent inflation-beating returns by investing in gold and silver. You may ask that how can a common investor invest in the precious metals as huge investments and storage issues are involved. Well, there’s a convenient and painless way to go about it- invest in Gold/Silver ETFs. This brings up the question of choosing the right ETF.

How to choose the Right ETF?

The best way to choose a gold/silver ETF is to look at VICTER. Where V stands for Volume (tells you how easy it is to buy/sell quantity), IC for Impact Cost (tells you how more you will pay to buy more/ getting less due to liquidity), T for Tracking Error (tells you how well the ETF is replicating the index) and ER for Expense Ratio (tells you how much fee you will pay per year).

Nippon Gold ETF

In case of Gold ETFs, Nippon India was first of the block with Nippon India ETF Gold BeES. In the 5 years to March 31,2023, this ETF has given a return of 12.94% CAGR, while the domestic prices grew by 14.02% during the period. Since inception to March 31, 2023, the domestic prices of physical gold grew by 12.12% CAGR, while the fund gave a return of 11.05%.

Nippon India ETF Gold BeES on VICTER Scale:

NSE and MFI data till March 31, 2022, shows a clear dominance of Nippon India in the Gold ETF space with 12 players. Volume (V): In terms of daily average volume on NSE in 1 year to March 31, 2022, Gold BeEs was at top with Rs 1,522 lakh crore, nearly 7 times more than the closest competitor and more than 50% of the total average daily volume of Rs 2,838.99 lakh crore. In the 3-year period to March 31, 2022, picture remained the same. At an average daily volume of Rs 1,943.12 lakh crore, Nippon India ETF Gold BeES was nearly 4 times ahead of the closest competitor, and again accounted for more than 50% of total of Rs 3,594.58 lakh crore.

Impact Cost (IC)

Nippon India ETF Gold BeES had the lowest Impact Cost of 0.03 among the 12 players
Tracking Error (T): The annualised Tracking Error for Nippon India ETF Gold BeES was 2nd lowest at 0.16 among the players for which data is available.

Expense Ratio (ER):

As on April 6, 2023, Nippon India ETF Gold BeES had the highest Expense Ratio at 0.82.
Nippon India Silver ETF: This ETF has given a return of 5.28% CAGR in the year to March 31, 2023, while the domestic prices grew by 5.98% during the period. Since inception till March 31, 2023, this ETF has given a return of 13.18% CAGR, almost matching the 13.88% rise in the price of physical silver in India.

Nippon India Silver ETF on VICTER Scale

The dominance of this ETF in the silver ETF space with 7 players is evident from the NSE and MFI data till March 31, 2022.

Volume (V):

In terms of daily average volume on NSE in 1 year to March 31, 2022, Nippon India Silver ETF was a clear leader with Rs 756.21 lakh crore which is nearly 3 times more than the closest competitor and more than 50% of the total of Rs 1,336.48 lakh crore. In the 3-year period to March 31, 2022, Nippon India’s dominance is no different. At an average daily volume of Rs 949.95 crore, Nippon India Silver ETF is nearly 4 times ahead of the closest competitor, and accounted for more than 60% of total of average daily volume of Rs 1,394.08 lakh crore.

Impact Cost (IC):

Nippon India Silver ETF had the 2nd lowest Impact Cost of 0.03 among the 7 players.
Tracking Error (T): The annualised Tracking Error stood at 0.73. Tracking Error data for others was not available for the mentioned period.
Expense Ratio (ER):

As on April 6, 2023, Nippon India Silver ETF had the highest Expense Ratio at 0.51
How to Invest? Storage and security, both are an issue if one wants to invest in physical gold and silver. A convenient and cost-effective way to invest in the two precious metals is through Exchange-Traded Funds or ETFs. One unit of Gold ETF, which tracks price of physical gold, equals 1 gram of gold which is backed by physical gold of 99.5% purity. While, in case of Silver ETFs, units are backed by physical silver of 99.90% purity. Investing in Gold or Silver ETF is akin to purchasing gold or silver in electronic form. However, for both Demat account is mandatory. Like all other ETFs, Gold and Silver ETFs are too traded like stocks on exchanges. Liquidity is not a concern, as you get cash equal to your holdings based on the price of metals on the day of redemption.

Advantages:

Apart from being transparent, there is no entry or exit load, purity is guaranteed and you don’t have to pay STT or wealth tax. For taxation purposes, Gold & Silver ETFs are taxed like pure debt funds, but despite the withdrawal of LTCG benefit, these funds continue to be tax efficient way for gold and silver investments.

Conclusion:

In the end we can safely say that Gold & Silver ETFs are one of the safest ways to add the glitter of precious metals in your portfolio. It helps you diversify, get decent inflation-adjusted returns, beat market volatility without the pain of market timing. These ETFs are a tool to get stable returns with minimum risk and investment. Criterion for choosing an ETF is VICTER scale, where Nippon India happens to be the Numero Uno!

( A Financial Awareness Initiative by Money9)