It’s time to add gold ETFs to your portfolio

KS Badri Narayanan Chennai | Updated on September 09, 2019 Published on September 07, 2019

Gold prices have been on the rise due to the accommodative monetary policy of central banks across the world.

No doubt, gold exchange traded funds and world gold funds are glittering right now. The current turbulence being witnessed in the global and domestic equity and debt markets pushed the investors around the globe towards gold as a safe haven bet.

Gold prices have been on the rise due to the accommodative monetary policy of central banks across the world. Spot gold is hovering above the $1,500-mark a ounce at the global markets, while in the domestic market, it is ruling at around ₹39,000 for 10 grams, after breaching the psychological ₹40,000-mark recently.

Gold ETFs versus others

A gold ETF invests its entire corpus in physical gold bars. As gold ETFs aim to track the price of the metal, if gold prices go up, the net asset value of gold ETFs goes up and vice versa.

Gold ETFs have posted an annualised return of 8.62 per cent during the 10-year period. If one takes the last one year’s performance, gold ETFs have outperformed with at least 26 per cent return, as against the negative return of the BSE Sensex, the NSE Nifty, the BSE SmallCap or the BSE MidCap indices.

In comparison, the BSE Sensex has returned an annualised return of 8.94 per cent in the 10-year scale while the BSE 100 produced a return of 8.75 per cent and the diversified BSE-500 gave out a return of 8.86 per cent. The BSE MidCap returned 8.63 per cent and the battered BSE SmallCap’s return stood at 6.06 per cent.

According to, large-cap funds produced an annualised return of 9.81 per cent during the same period while the similar figures for large & mid-cap, multi-cap, mid-cap and small-cap are 11.37 per cent, 11.29 per cent, 14.20 per cent and 12.54 per cent, respectively.

If one takes into account the expense ratio, gold ETFs’ performance is almost on par with some of the best schemes. While active equity funds charge an expense ratio in the range of 1.2-2.9 per cent (regular schemes), gold ETFs charge just 0.35-1.15 per cent. Of course, for direct schemes, the expense ratio is lower in the range of 0.19-2.57 per cent.

Investors’ appetite

However, gold ETFs are still not attractive to investors. Despite the elevated volatility and sharp correction in mid- and small-caps, investor faith in mutual funds has remained firm with steady inflows. According to SEBI data, equity and equity-linked saving schemes added 9.33 lakh investor accounts in FY19, taking the total folios to 6.28 crore. As against this, investor accounts fell 8,723 to 3.2 lakh for gold ETFs. As of July end, the figure rose to 3.39 lakh.

Many empirical studies show that gold can be used as a hedge against portfolio volatility, particularly if one invests for longer duration of at least 10 years. Studies say a 30-per cent holding or zero exposure to gold in a portfolio does not alter the return much. However, the portfolio volatility comes down significantly as exposure to gold is increased.

So, it is time to add gold ETFs to one’s portfolio, especially given the global uncertainty, which is likely to escalate in the days to come.

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Published on September 07, 2019
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