Why do Gold ETF NAVs differ across schemes?

Tracking error and annual expense are the two important factors affecting the NAV of gold ETFs.

Mumbai: Recently, a distributor wrote to us asking why net asset values (NAV) of gold ETFs differ. In this article, we try to explain the factors affecting the NAV of gold ETFs.

Many investors equate a low (NAV) to a cheaper fund. However, it is not so, as the NAV is just a reflection of the underlying market value of assets.

As you can see in the above table, Quantum Gold ETF’s NAV is the smallest. This is because it is the only fund house offering one unit of gold ETF equal to price of half (½) gram of gold. The allotment price of most gold ETFs is equivalent to 1 gram of gold. Thus, its NAV is widely different from its peers.

A major factor which impacts the NAV is the annual expense charged on the scheme. A fund having a bulky AUM charges less management fee than a fund with a small corpus. Thus, the cost of a scheme is determined by the annual expense charged by the AMC.

An important factor causing the differentiation in NAV is tracking error, which is the difference in physical gold prices vis-à-vis gold ETF returns. Tracking error is simply the difference between the daily returns of gold and the NAV of the scheme. Tracking error occurs due to a variety of reasons like large redemptions, recurring expenses, dividend payout and delay in purchase or sale of gold due to illiquidity of gold. The tracking error is not expected to be higher than 2% under normal circumstances. Tracking error impacts the returns of the scheme. Thus, a high tracking error will result in lower performance and vice versa.

“If a fund A has been in existence since three years and fund B is in existence since 4 years, and both are charging 1% annual expense the difference between the NAV of both schemes should not be more than 1%. The second important factor is tracking error. A fund which has a low tracking error will have a higher NAV and vice versa. If a fund has more exposure to money market then the tracking error would be higher,” says Chiraj Mehta, Fund Manager Commodities, Quantum Mutual Fund.

As Gold ETFs have a small exposure to money market instruments the returns of Gold ETFs may slightly vary which in turn impacts the NAV. Although fund houses have the leeway to invest in money markets most funds try to replicate the prices of gold by investing more than 95% in gold. Gold ETFs are not supposed to outperform gold.

The NAV is also impacted by the timing of investment in gold and the redemptions.

Gold ETFs invest a minimum of 95% of corpus in domestic gold and a maximum of 5% in money market instruments. They are passively managed funds and do not buy or sell gold to take advantage of fluctuations in the gold price. Most fund managers don’t try to time the market for investing in gold as their calls might go wrong.