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Physical gold or gold ETF? Which is better in terms of return on investments? Before comparing the returns given by both these investment instruments, it’s important to understand their fundamental differences.
Physical gold refers to gold that is purchased in the form of coins, bars or jewelry. Physical gold is owned directly by an individual or organisation. In contrast, gold ETFs (Exchange-Traded Funds) are an investment option that allows investors to buy shares representing a portfolio of gold or gold-related assets, which are traded on the stock market.
Physical gold typically incurs higher initial costs due to manufacturing and storage expenses. On the other hand, the acquisition and owning costs of gold ETFs are less expensive. The one cost associates with gold ETFs is brokerage fee, to be paid on buying and selling.
Liquidity is another distinguishing factor. Physical gold may take longer to sell and convert into cash, gold ETFs can be quickly bought or sold on the stock market.
Gold or Gold ETF? Which is better?
“Investors favour investing in gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the US Federal Reserve in the coming months,” Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, says.
Expressing similar views, Ramkumar S, Partner, Grant Thornton Bharat, says, “Gold has become a safe investment option owing to inflationary pressure and increasing geopolitical pressure, however manufacturing, storage, insurance expense results in a higher initial cost and the biggest problem is its less liquid and may not give you the same return as other asset class.”
“Gold ETF nullifies this as its less expensive with some brokerage costs for each transaction. Also its easy to liquidate the same through the exchange and there is quick price discovery unlike physical gold. The value of Gold ETF comes from this,” adds Ramkumar S.
Gold ETF price is determined by supply and demand and the returns will fluctuate basis the forces of demand and supply and the prices will always be lower than physical gold, however, gold ETF to be more liquid and that it not having any storage cost will find more investors opting for it rather than physical gold, he emphasizes.
Gold Vs Gold ETF – Which has given better returns in 1, 3 and 5 years?
Gold
The price of gold has seen a significant increase over the past year, rising from Rs 61,690 on October 21, 2023, to Rs 80,420 on October 21, 2024. This represents a remarkable jump of Rs 18,730, equating to a percentage increase of approximately 30.3%.
The price of gold on October 21, 2021, was Rs 47,570. As of October 21, 2024, the price has risen to Rs 80,420. This marks an increase of Rs 32,850 over three years, resulting in a return of approximately 68.9%.
The price of gold on October 21, 2019, was Rs 38,500, and it has risen to Rs 80,420 by October 21, 2024. This reflects an increase of Rs 41,920 over the five-year period, yielding a return of approximately 108.9%.
Gold ETFs
There are as many as 17 Gold ETF schemes in the market and the average one-year returns was in the range of 29.12% while 3-year and 5-year returns were 16.93% and 13.59%, respectively. LIC MF Gold ETF gave the maximum returns on a 1-year, 3-year and 5-year basis at 29.97%, 17.47% and 13.87%, respectively.
This is marginally lower in contrast to an average return of 30.13%, 18.03% and 14.88% over a 1-year, 3-year and 5-year period on physical gold.
In conclusion, when comparing the absolute returns of physical gold and gold ETFs, physical gold has outperformed in the long term. While Gold ETFs have shown impressive returns of 29.12% over one year and approximately 59.35% and 84.24% over three and five years, respectively, the absolute increase in physical gold prices highlights its robustness as an investment. Over the past year, physical gold rose significantly, reflecting a 30.3% increase, and over three and five years, it demonstrated remarkable returns of 68.9% and 108.9%, respectively.