gold etf expense ratio and etf gold unit value

POSTED BY bharat shah ON March 5, 2012 10:57 pm COMMENTS (8)

would it for gold etf expense ratio @ 1% per year come from diminishing the value of 1 unit’s value @ 1% p.a. that means theoretically in 100yrs. the value of 1 unit of etf gold wold be almost zero irrespective the actual price of physical gold at that time?

8 replies on this article “gold etf expense ratio and etf gold unit value”

  1. bharat shah says:

    though ashal and justgrowmoney offered meaningful comments, i came across the same topic in this forum under heading ‘Gold ETF Versus Physical Gold – Expense Ratio is Hurting’
    (where i also participated in initial stage and ashal incidently concluded!) and found it comprehensive. interested may go through it and conclude his own in the matter.

    1. Dear friends, here is my concluding reply in the other post as mentioned by dear Bharat Shah.

      Quote –

      “Dear Saurabh, To make all the matter simple, I’m putting my foot in.
      In my view, never invest in Gold for the sake of investment. If you are married already & having kids or in future there ‘ll be kids, for both cases, visualize how much gold you ‘ll gift to your kids at the time of marriage. Divide that quantity by the no. of months remaining to reach the marriage age. This mly purchase figure is your target. You are not investing in Gold with out a goal & you are not investing in lump sum. The Gold this purchased over the period ‘ll automatically give the benefit of diversification.
      By the way if you are already 30 or 35, ‘ll you keep your Gold investment for next 70Y i.e. your age 100 in demat form?
      Hope it helps to you.
      Thanks
      Ashal”

      Unquote – for those of you, who still want to check the full article, here is the link –

      http://localhost/jagoforum2/gold-etf-versus-physical-gold-expense-ratio-is-hurting/1919/

      Thanks

      Ashal

  2. Few points to ponder:

    1) If someone buys jewelery there is a direct cost of 5% to 25% depending on the jewel that is paid up front
    2) If someone buys Gold coins:
    GOLDEX closed at 2668 (Check http://www.icicidirect.com)
    2 Gm Gold coin retails for about 6192 in SBI today [https://www.sbi.co.in/user.htm?action=goldRates]. So one gram will be about 3100. Larger the block lower the price. So 1 gram costs about 400 more or about 15% more than what GOLDEX can be bought for.
    3) I did not go down to check GOLD MF rates – I expect them to be slightly more than GOLDEX.

    SO if you buy jewelery you lose 15% upfront (and more when you exchange it later)
    If you buy GOLDEX you spend about 0.55% as Trading COST and will incur recurring expenses ratio of 1% – 2% every year
    If you buy a GOld coin you pay 10%-15% upfront.

    ========
    If you keep buying Gold (which is why we are discussing this) then:

    1) Jewelery gives the max satisfaction (for most people) and least investment value!!
    2) Gold bars/biscuits come next in investment value as they are front loaded with high costs as compared to ETFs though the recurring expense is the storage cost. Since lockers are used by almost all families buying a small biscuit or two wont specfically increase storage costs so lets ignore them.
    3) GOLDEX (And ETFs): Athough these incur a recurring cost in future the current day outgo is way lower than the 2 options above. SO the IRR is higher in case 3.

    Trust this suffices.

  3. bharat shah says:

    my further thoughts on the subject! as expense ratio is calculated on total AUM and th gold etf AUM is prominently in gold, as a matter of convenience for calculation we can take expense ratio as 1% p.a. of gold(weight) of the unit . thus the gold would diminish at rate of 1% p.a. rate , of course on previous year gold (weight) of the unit. if we diminish gold(weight) of the unit for 25 years, the weight would be: weight of gold unit at the start * 0.99* 0’99*0.99 —-(25 times o.99)’ and it would be @ 0.7778 * weight of gold unit at the start .that is you will loose @ 22.28% of gold unit in 25 years i.e. the cost of security cost for your gold in 25 yrs! which might inherited from your grandparents for your children! and if you prefer gold mf units, you may have to loose more. so be careful for selecting such avenue for gold gathering!

    1. Dear Bharat Shah, The fund management charges are recovered on daily basis but in total it can’t not be more than the stipulated limit (1% for Gold ETFs). How it’s done? Out of 365 days in a year, 104 days are non business days on exchanges for Saturdays & Sundays. Add some public holidays of 12-15 days, so the actual business days come out around 250 days only in a year. So this 1% rate is evenly spread for these 250 days & not one time deduction at the end of the year.

      Thanks

      Ashal

  4. BanyanFA says:

    @ Justgrowmymoney – You were spot on !

    Regards
    BFA

  5. bharat shah says:

    @justgrowmymoney
    thank you. well explained!

  6. 1% reduction of the current value will keep approaching zero never become zero.

    Year 1: 100
    Year 2: Reduce 1% = Reduce 1 = final value = 99
    Year 3: Reduce 1% = Reduce 0.99 = final value =98.01 and so on.

    This is for a case where the value of Gold never increases at all.

    ========================
    If gold grows by 10% per annum the following will be the values:

    Value @ End of Year 1: 100
    1% deduction => Value is 99
    Vale of end of year 2: 99+9.9 = 108.9
    1% deduction => Value is 108.9 minus 1.089 = 107.811 and so on.

    This is how MF NAVs grow. As the NAVs grow/fall the expenses are deducted from the NAV on a regular basis.

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