What should be my ideal return if I buy into a Gold ETF? Should it mirror the gold prices exactly?
I guess yes. I think Gold ETF was launched for people to buy & hold gold in demat format. It is always safer to hold gold in demat, there is no risk of theft etc. When you actually need to buy Gold, you can liquidate the ETF and buy physical gold from the sale proceeds.
However if you are going to buy jewellery I think you may have to account for wastage and other such incidental costs.
Ideal return from a gold ETF should mirror what the underlying Gold prices do, but it doesn’t and the reason being:
Gold ETF is a Mutual Fund that trades on the exchange, and there is a business that manages this fund that has to earn along with taking care of the cost of MF managers and the entire support ecosystem. This is recovered by charging a management fees which varies between 0.5% to 1.5% per year on the asset under management. This management fees usually causes what is called a tracking error, and typically Gold ETF’s will underperform the real gold price movement.
You might now think of buying physical gold itself, but a Gold ETF solves ssues that exists with buying actual gold which is, safe keeping of physical gold, Quality, and wastage charges in case of jewellery.
The best product actually was the e gold contract which was launched by NSEL until it ran into trouble as an exchange. With e gold, you could buy demat form of phsyical gold, like you buy stocks. This would mean no tracking error like in Gold ETF’s or worrying about safekeeping and wastage as in physical gold. Hopefully we will have the product back, sooner than later on some other exchange.