Gold ETF vs GOLDBEES: which one should you invest in?

In India, gold has been an integral part of people’s lives, not just as ornaments but also as an investment. As technology has progressed to make gold investments more efficient and convenient, the terms that have become commonplace are “Gold ETF” and “GOLDBEES”. However, are the two competing against each other? Or is there one within the other?

What exactly is a Gold ETF?

An ETF for Gold is an investment in the price level of gold in the country. The unit of this investment usually represents 1 gram of gold (or less than that), which is represented in the form of actual gold holdings kept by the custodians of the Asset Management Company. You can purchase the units on the stock exchange via your Demat account.

Some of the existing Gold ETFs in the Indian market include Nippon India, SBI, HDFC, ICICI Prudential, Kotak, etc. The category name is "Gold ETF," while the individual ETFs belong to that category.

So what is GOLDBEES?

GOLDBEES is just the abbreviation of Nippon India ETF Gold BeES – the very first Gold ETF in India, which was introduced in 2007 under Benchmark AMC. It has become so popular that it is now considered the most-traded Gold ETF on the NSE because of its pioneering status. In other words, Gold ETFs can be compared to smartphones, while GOLDBEES is like an iPhone among them.

Key differences you should know

• Liquidity and trading volume

GOLDBEES always registers the highest trading volume when it comes to all Gold ETFs registered in India. Why does this matter? Since bid-ask spreads are narrow, you will never lose money through slippage during your buy or sell actions. Newer or smaller Gold ETFs may lack high liquidity; thus, conducting large transactions might be difficult and costly.

• Expense ratio

Expenses charged in Gold ETFs registered in India are usually between 0.09% (newer Gold ETFs) to 0.65%. The expense ratio for GOLDBEES is at about 0.54%, meaning that it falls in the middle of that bracket. In case you are very cost-sensitive and would not mind using some newer and less established funds, then you have got options here. Otherwise, for most people, it will not make a lot of difference.

• Tracking error

Tracking error indicates the degree of correlation between an ETF's net asset value (NAV) and actual gold prices. GOLDBEES has had a relatively high tracking error, but this has improved significantly over time. Tracking error is used to determine the effectiveness of an ETF in providing the actual return from gold investments.

• AUM and trust factors

The GOLDBEES Gold ETF has the highest AUM out of all Gold ETFs. The more AUM it has, the more support there will be for the fund, and it will be less likely to be closed down or become difficult to trade. Smaller Gold ETFs have the slight possibility of being merged with other funds or closed down.

• Accessibility 

For trading in all Gold ETFs, one will need to have a Demat account. All Gold ETFs are listed in NSE and BSE; however, GOLDBEES is accessible through most of the brokers in India.

When does it make sense to choose GOLDBEES?

• You are an inexperienced gold investor looking for maximum stability and liquidity.
• You are a frequent or high-volume trader where narrow bid-ask spreads are important.
• You are more comfortable with a fund with the most experience in India.
• You are using a broker who suggests this fund by default.

When might another Gold ETF be better?

• You are a SIP investor for a long period and wish to reduce the expense ratio (as is available in funds such as Mirae Asset Gold ETF).
• You are conducting an analysis and find that your competitor has a lower tracking error and expense ratio.
• The trading platform offered by your broker gives you better support than GOLDBEES.

The tax treatment: same across the board

However, it should be pointed out that all the gold ETFs, GOLDBEES included, are taxable on the same footing in India. Long-term capital gain, meaning gains from investments held over 24 months, is taxable at 12.5% without indexation as per the new tax norms as stated in the Budget 2024.

Conclusion

In this discussion about GOLDBEES versus Gold ETF, there is a certain misunderstanding, because GOLDBEES is a Gold ETF itself. The actual issue here is whether GOLDBEES should be considered an optimal Gold ETF against other similar instruments available on the market.

At present, for individual investors in India, GOLDBEES remains the best and only feasible alternative, boasting unsurpassed liquidity, a long history, and complete coverage by all brokers operating in India. Yet, for cost-sensitive and committed investors, newer Gold ETFs, boasting reduced expense ratios, should not be overlooked.

Nevertheless, it seems safe to say that in this case, the very nature of investment is of greater significance compared to the particular Gold ETF chosen. Any decently managed Gold ETF provides proper exposure to gold in terms of costs and taxes.

Note: Expense ratio and tracking error figures are indicative and subject to change. Always check the latest fund factsheet before investing. This is not financial advice; consult a SEBI-registered investment advisor for personalised guidance.