Gold Exchange Traded Funds

Q. Why is this in News?

A. In July 2022, Gold Exchange Traded Funds (ETFs) witnessed a net outflow of Rs 457 crore as investors parked their money in other asset classes as part of their portfolio rebalancing strategy.

• This was in comparison to a net inflow of Rs 135 crore in June 2022.

Q. What are Gold Exchange Traded Funds?

A.

• About:
  • Gold ETF, which aims to track the domestic physical gold price, are passive investment instruments that are based on gold prices and invest in gold bullion.
  • Gold ETFs are units representing physical gold which may be in paper or dematerialised form.
    • One gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity.
    • They combine the flexibility of stock investment and the simplicity of gold investments.
• Advantages:
  • There is complete transparency on the holdings of an ETF.
  • Gold ETFs have much lower expenses as compared to physical gold investments.
  • No wealth tax, no security transaction tax, no VAT and no sales tax is levied on ETFs.
  • There is no fear of theft as ETFs are safe and secure as units held in Demat Account of the holder.

Q. What could be the Reasons for the Outflow?

A.

• Investors’ expectations of a rising interest rate cycle leading to a fall in gold prices.
  • The fall in the gold price impacted the net flows into the gold ETFs.
• A falling rupee is another factor that has likely impacted the demand and supply dynamics of gold.
  • It has been witnessed globally too, with gold ETF’s posting significant outflows on the back of lower gold prices.

Q. What is Exchange Traded Fund?

A. 

• An Exchange-Traded Fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
• ETF reflects the composition of an Index, like BSE Sensex. Its trading value is based on the Net Asset Value (NAV) of the underlying stocks (such as shares) that it represents.
• ETF share prices fluctuate all day as it is bought and sold. This is different from mutual funds that only trade once a day after the market closes.
• An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector.
• Bond ETFs are a type of ETFs which may include government bonds, corporate bonds, and state and local bonds—called municipal bonds.
  • A bond is an instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
• Besides being cost efficient, ETFs offer a diversified investment portfolio to investors.