MUMBAI – Gold exchange traded funds, also called gold ETFs, are the flavour of the season in India. Investors are rushing to trade in gold ETFs, which allow investment in the yellow metal in non-physical electronic mode.
As the Indian stock market tanks on a regular basis these days, small and wary investors are eager to invest their money in a safe haven. Preliminary figures for gold ETF activity released by India’s central bank indicate a continued positive trend, with several new gold mutual funds being launched in the first quarter of the year.
According to the Securities and Exchange Board of India, which is India’s capital markets regulator, assets under gold ETFs increased 170% during 2010-11 to $ 976 million (Rs 4,400 crore).
Gold ETFs have been regulated by SEBI since their inception in 2007. SEBI has held that the valuation for gold held by a gold exchange traded fund scheme shall be at the AM fixing price of London Bullion Markets Association (LBMA) in US dollars per troy ounce, for gold having a fineness of 995 parts per thousand.
Data showed that as of March 31, 2011, the number of folios under ETFs, including gold-backed ones, had grown 130% to 442,000 units, while assets had expanded 170%.
Gold gets a boost
The yellow metal’s shine has become all the more lustrous, with both the stock exchanges in India – the BSE and the NSE – agreeing to conduct extended live trading sessions for trading in gold exchange traded fund securities.
This year, the exchanges flagged May 6, the day of the Akshaya Tritiya festival as the time for the extended sessions. And what a surprise was in store.
“We had a turnover nearing $ 110 million on both the bourses by 7 pm that day,” said a stock exchange official, adding that the trade volume had more than doubled as compared to last year.
Last year, the National Stock Exchange (NSE) saw volumes of $ 38 million in gold ETFs on Akshaya Tritiya day. The jump was unprecedented.
The exchanges waived all transaction fees on gold ETFs for the day, which added to the grandeur, and had also extended trading hours beyond the normal closing time.
The official said nearly 70,000 investors had traded in gold ETFs on that day, as compared to the nearly 41,000 investors that had used the exchange on Akshaya Tritiya last year.
The number of gold ETF units traded almost doubled to around 1.8 million, while last year on Akshaya Tritiya day, it was a little over 1 million.
Bullion retailer and analyst to a Mumbai-based fund house, Somesh Shah said higher gold prices have been working against physical gold sales. “The investment demand for paper gold has been on a tremendous rise,” he said.
Gold ETFs have allowed investors to participate in the bullion market without the necessity of taking physical delivery of gold, he said. With India being the largest consumer of gold, coupled with the benefits of ETF, “it is only natural that gold ETFs are accepted by the Indian investor,” Shah added.
“ETFs, as the name suggests, allows investors the ability to trade their holdings in the stock exchange,” said retail analyst, Moreshwar Kapadia with a brokerage firm here. “Over the years, there is an increasing awareness of gold as a financial asset. The move is not restricted just to India. The SPDR gold ETF investors are already up more than 6% for the year,” he added.
Analysts also spoke about billionaire investor George Soros’s hedge fund dumping most of its gold holdings during the first quarter. The Soros Fund Management, based in New York, owned 49,400 shares of the SPDR Gold Trust at the end of March, which is down from 4.7 million shares held at the end of December, 2010.
The gold ETF positions were valued at over $774 million at the end of the fourth quarter, by far the firm’s largest position at that time, reports indicate. At the end of the first quarter, the remaining gold position was worth less than $7 million.
“Soros might have bailed out, but in India, gold ETFs have been consistently generating excellent returns and are set to become one of the popular investment avenues,” said a senior official of a nationalised bank here.
SBI Gold ETF, which was launched on May 18, 2009, has been termed by analysts as one of the best performers in the category. In one year, it fetched 28.09% compounded annualised returns.
Reliance Gold ETF, on the other hand, generated 23.48% compound annual growth rate (CAGR) returns, since its inception on November 21, 2007.
UTI Gold ETF has given 27.97% and 24.33% compounded annualised returns for one year and three years tenure, respectively.
Achal Kumar Gupta of SBI Mutual Fund notes that several investors are investing in gold ETFs. Apart from that, in the current year, “we also saw four new funds being launched from one bank alone, which also boosted the assets of gold ETFs. The only way from here is – up.”