History of ETF

The first idea of owning gold indirectly came in 1961 through a closed-end fund called Central Fund of Canada. It allowed ownership of gold and

silver bullion but it was a mutual fund in which new investors could not come in and be part of the action unless they bought shares from the current shareholders. The Benchmark Asset Management Company

Private Ltd in India were the first to apply for creating a gold ETF in 2002, but at the time didn’t receive the regulatory approval necessary. Instead

the first gold ETF was launched in Australia by the name Gold Bullion Securities in 2003. Since then dozens of alternate gold ETFs have

appeared globally performing essentially the same function but in different ways.

Types of ETF’s • 1. United States Market Index ETFs

• 2. Foreign Market Index ETFs

• 3. Foreign Currency ETFs

• 4. Sector and Industry ETFs

• 5. Commodity ETFs

• 6. Derivative ETFs

• 7. Style ETFs

• 8. Bond ETFs

• 9. ETNs – Exchange Traded Notes

• 10. Inverse ETFs

• 11. Leveraged ETFs

• 12. Actively Managed ETFs

• 13. Dividend ETFs

• 14. Innovative ETFshttp://etf.about.com/od/typesofetfs/tp/4_Types_of_ETFs.01.htm

Types of Gold ETFs• 1. Gold ETFs That Contain Gold Products

• The nice thing about gold ETFs is that you can invest in gold without actually buying gold doubloons and storing themin the attic safe. Gold ETFs like IAU and GLD, track the performance of gold by including gold products like bullions in atrust that is used to cover the liabilities of the fund on an as-needed basis.

• 2. Gold ETFs That Contain Gold Futures

• Some types of gold ETFs are constructed differently to track the performance of gold. A gold ETF like DGL consists ofderivatives like futures, forwards, and options in order to emulate a gold index. This same construction strategy is notlimited to gold ETFs, but used for manycommodity ETFs as well.

• 3. Gold Industry ETFs

• Another type of gold ETF consists of companies in the gold industry. Like a sector ETF, this type of gold ETF will trackcompanies that heavily rely on gold as their core business. For example, GDX tracks the performance of the Amex GoldMiners Index which consists of companies in the gold mining industry.

• 4. Gold ETNs

• While similar, there are differences between an ETF and an ETN. However, the nice thing is that there are both goldETFs and gold ETNs, so an investor has a choice if he or she prefers one over the other. An example of a gold ETNis DGP which tracks the Deutsche Bank Liquid Commodity index - Optimum Yield Gold Excess Return.

• 5. More Than Gold ETFs

• There is no doubt that gold is a popular commodity and the most common precious metal. However, if an investor islooking for exposure to more than one precious metal like silver or platinum, then there are types of gold ETFs thaninclude multiple metal products. A precious metal ETF like DBP, the PowerShares DB Precious Metals ETF may be agood fit for a portfolio looking for other precious metals tied to its gold investments.

• 6. Short Gold ETFs

• Acting like an inverse ETF, a short gold ETF is uniquely constructed to inversely track the performance of a gold ETFindex. For example, when you purchase the GLL, you earn a profit as the index drops in price. So when you buy the ETF,it acts as if you sold the gold ETF. Perfect for investors who wants to short gold, but has account or margin restrictionsthat prevent them from selling an ETF.

Some Basic Terms of ETF

NAV: Stands for Net Asset Value declared everyday by the Asset Management Company(AMC) which manages the ETFs. It is calculated by dividing the total value of the portfolio less any liabilities, by the number of fund ETFs outstanding.

Bid: The price at which the investor wants to buy Gold ETF

Ask: The price at which the investor wants to sell Gold ETF

Creation: The procedure of creating fresh Gold ETF whenever there is demand ETF from Authorised participants (AP’s)

Redemption: The procedure of buying back Gold ETF whenever there is a supply ETF from AP’s

Tracking Error: This is the difference in the live quote of domestic price with that ETF(generally it ranges between 0.05%-0.07%)

Common questions regarding ETF•Need to invest in Gold

Gold counters the effects of inflation and currency fluctuations, and also has performed as an economically secure asset during times of recession. During difficult times, gold has not only retained its value but performed much better than most of other asset class. In times of inflation Gold has been insurance for the portfolio and has prevented value erosion.

Importance of Gold ETF

Unit of dematerialized gold

Lists and trades on stock exchange

Every ETF unit is backed up with physical gold

Unit of dematerialised gold

Transparent real time prices

Can be purchased in small lots

Tax efficient way to hold Gold

What makes Gold ETF

attractive?

Comparison of Gold Investments•E-Gold Pros: 1. No recurring charges like expense ratio of mutual funds, ETFs involved.2. Units as small as 1 gram can be redeemed for physical gold. 3. Greater price transparency.Cons:1. Separate trading account and demat account needed for trading in e-gold.2. Not the best way to invest in terms of tax. It treated as physical gold for taxation.

3. Newly launched product in India.Commodity exchanges are not well regulated like stock exchanges.

• Gold ETFs Pros 1. Units are backed by corresponding units of physical gold which are kept in secured vaults. 2. Returns close to that of e-gold. 3. Long term capital gains tax of 10% without indexation or 20% with indexation kicks in after 1

year. No wealth tax applies.Cons: 1. Trading account and demat account needed for buying ETFs.

http://www.moneycontrol.com/news/gold/investinggold-heresome-recommended-methods_837701.html?utm_source=ref_article

• * Gold mutual fund

Pros

1. Through Systematic Investment Plan ( SIP ) of gold mutual funds one can affordably have disciplined investment in gold. One can invest as little as Rs 100 every month in gold funds.

2. Long term capital gains tax of 10% without indexation or 20% with indexation applies after 1 year. No wealth tax applies.

Cons

1. Expense ratio is higher than in gold ETFs.

2. Returns slightly lower than that of gold ETFs depending on fund’s performance.

* Physical gold

Cons

1. Banks charge premium is charged on gold bars and coins. Reselling them is difficult.

2. Storage costs and making charges involved. Issue of safety is also large.

3. Most unfavourable way in terms of tax. Long term capital gains tax of 20% with indexation applies only

after 3 years of buying it. It attracts wealth tax.

Conclusion: If you own a demat account gold ETFs are the best form of gold investment for you. If you dont,

choose gold mutual funds. E-Gold needs time to mature as a product and the separate account

requirements are too demanding for those not accustomed to trading. While jewelry has value as

consumption article, gold bars and coins should be avoided.

Tax Benefits

• Wealth Tax

• Benefits of Long Term Capital Gains Tax Rate

• Value Added Tax (at the time of purchase)

Banks

• Applicable

• After 3 years

• Applicable

Jewellers

• Applicable

• After 3 years

• Applicable

Funds of Funds

• NA

• After 1 year

• NA

Gold ETF

• NA

• After 1 year

• NA

Reasons to buy Gold ETF

Benefits of Gold ETFs • Transparent Pricing

• Easy Accessibility

• Purity

• Security

• Available in smaller denomination

• Allows easy asset allocation and diversification

• Tax Benefits:

a) No Sales Tax/VAT/STT is chargeable on gold bought through ETF.

b) As the units are traded on the stock exchanges, the period for holding for an investor to be eligible for long term Capital Gains Tax is 1 year Vs 3 years in case of physical gold.

• Transferability

• Investing Flexibility

Gold ETF VS Mutual Funds• 1. Tax Benefits• The biggest advantage an ETF has over a mutual fund is the tax benefit. Due to their construction,

ETFs only incur capital gains taxes when the fund is sold. In a mutual fund, capital gain taxes are incurred as the shares within the fund are traded during the life of the investment.

• 2. Simplicity• When you buy or sell an ETF, it is done at one price with one transaction. You are a trade away from

opening or closing a position. With mutual funds, shares in the asset are constantly being traded to hit a target price and seek a desired performance. Multiple trades, multiple prices.

• 3. Cost-Effectiveness• As well as being simplistic investments, ETFs are also more cost-effective than mutual funds. Since

shares in a mutual fund are actively traded and the fund itself is actively managed, they sometimes rack up large management fees. Fund managers have to charge for their time after all. With an ETF, it’s one transaction. Just like purchasing a stock. This cuts down on fees and commissions. There will be multiple commissions associated with a mutual fund due to its activity and volume.

• 4. Investing Flexibility• With more and more ETFs being released, investors have more options to target a specific trading

strategy. Commodity ETFs, Style ETFs, Country ETFs, even Inverse ETFs. There are so many types of ETFs for investors, tracking the performance of a certain index or achieving a specific financial goal may be more attainable than with a mutual fund.

• 5. Transferability• Whenever a managed portfolio is switched to a different investment firm, complications arise with

mutual funds. Sometimes the fund positions have to be closed out before a transfer can take place. That can be a major headache for investors. Liquidating a portfolio’s mutual funds may increase risk, increase commissions and fees, and incur early capital gains taxes. With an ETF, the transfer is clean and simple when switching investment firms. They are considered a portable investment.

E-Gold vs Gold ETFs• E-gold is held electronically in the demat form and can be freely converted into physical gold. In India, e-gold is offered

by the National Spot Exchange Limited (NSEL), which gives investors the option to invest in commodities such as gold, silver and platinum online.Any investor can buy gold in small quantities on the NSEL and sell it after making a profit. He also has the option of taking physical delivery of the metal.Another way of taking exposure to gold is gold ETFs, financial instruments that track the price of gold. "Gold ETFs are the same as mutual fund units where each unit is equivalent to one gram gold, though some funds give the option to invest in lower denominations of 0.5 gram as well.

• TRADING BASICS: 16 per cent is the average return given by e-gold in 2012 as compared to the 11 per cent average return from gold ETFs

• Brokerage: Trading in both gold ETFs and e-gold involves payment of a brokerage fee. For e-gold, it is 0.25 per cent of the purchase rate. The transaction fee for gold ETFs is Rs 1 per lakh compared to Rs 3.5 per lakh for equities, says Regoof Right Horizons.

Taxation: Gold ETFs have an edge over e-gold here. For gold ETFs, one year is considered as the long term; it is three years for e-gold. Also, egold attracts wealth tax.

"E-gold is treated like physical gold and qualifies for long-term capital gains benefits if held for three years or more. However, gold ETFs qualify for long-term capital gains treatment after being held for just one year. Gold ETFs are considered financial assets and hence are exempt from wealth tax, which is not the case with e-gold," says Nayak of Centrum Broking.

Gains from gold ETFs, if sold within one year, are taxed according to the person's tax slab and at 20 per cent (after indexation) if sold after a year. Gains from e-gold, if it is sold within three years, are taxed according to the tax slab and at 20 per cent (after indexation) if sold after three years.

Indexation is adjusting the purchase price with inflation. It leads to a higher purchase price and lowers the tax liability. For instance, if inflation is 6 per cent and the investment is Rs 1,000, the inflation-adjusted price for taxation will be Rs 1,060. This will lower the capital gains.

7 ETF Investing Strategies• 1. Risk Management• Portfolios that have exposure to certain market sectors can purchase or short sell an ETF in

that particular sector to hedge against risk. Investors can counter risk by taking the oppositeposition with the correlating ETF.

• 2. International Exposure• Investors can gain exposure to international markets that show potential growth with the

purchase of a foreign ETF that follows the index for a particular country. Or in some casesinternational exposure can be gained by including foreign currency ETFs in a portfolio.

• 4. Cash Flow Utilization• During periods of excess cash flow, extra monies can be put to use by purchasing a short-

term ETF, so there is always an opportunity for earning a potential return. During periods ofcash flow deficit, ETFs can be easily liquefied with one single trade.

• 5. Price Discrepancy• Due to volatile market conditions, such as currency and interest rates, there may be price

differences among an index and its derivative contracts (futures and options). If calculatedcorrectly, the buy or sell of an ETF can take advantage of the arbitrage opportunity, but it stillis a difficult strategy to utilize.

• 6. Management Transitions• The accountability of a portfolio will change hands when fund and portfolio managers change

positions or leave financial firms. The purchase or sale of a short-term ETF can help bridgethat transition period in order to compensate for any risk exposure.

• 7. Market Analysis• After conducting a thorough analysis, an investor can utilize various ETF trading strategies to

take advantage of certain forecasts. For example, if an analyst has confidence in the overallmarket, but is bearish on a particular sector, a combination of ETFs can help take advantageof this information. One can purchase an ETF that tracks the broad market while selling anETF in the particular sector that will under perform.