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Performance Evaluation of Gold-ETFs in India

Performance Evaluation of Gold-ETFs in India

U.Rambabu ,S.Srinivasa Rao /Volume 13/Issue 2/(April-September 2020)

ABSTRACT

Gold ETFs is a financial product available for trading and maintaining the underlying gold assets at stock exchanges. Gold ETFS is a transparent instrument and provides small investors an effective and efficient platform for gold diversification Gold exchange traded funds lunched in India for the purpose of liquidity. Investors pull outs 31 crores from the gold ETF in October 2019 to book profit. This paper seeks to explore and analyzing risk in the Gold exchange traded funds and also finds out the risk behavior of the Gold ETFs with comparison of Bombay stock exchange. The data for this study have been taken from the BSE Web site. The duration of the study is from 2010 to 2019. The analysis is done by calculating the average returns, betas and a standard deviation from the twelve gold exchange traded funds by using of financial tools such as the Sharpe measures index, Treynor’s and Jensen measure index. The research will be beneficial for analysts and investors looking for the best opportunities.

 

Keywords: Gold ETFs, Average return, Standard deviation, beta, Sharp ratio, Treynor’s ratio, Jensen ratio.

1.0 INTRODUCTION

Gold Exchange Traded Funds (gold ETFs) are funds that invest mainly in gold and that can be bought and sold on exchange. Gold ETFs are essentially open-ended mutual fund schemes focused on continuously fluctuating gold prices. Gold ETFs have proven worthier than physical gold, as gold ETFs not only guarantee your yellow metal investment, but also provide the stability, liquidity and tax efficiency that comes with stock investments.

 

Key benefits of Gold ETFs

DIVERSIFICATION: Investing in gold ETFs helps an investor to diversify and spread his investments in a safer investment class.

 

EASY LIQUIDITY: Trade in gold ETFs directly

 

1.  U.Rambabu, Research Scholar, Commerce & Business Administration, Acharya Nagarjuna University, AP2. S.Srinivasa Rao, Associate Professor, TJPS PG COURSES, GUNTUR

on the stock exchanges, and buy or sell gold ETFs at any given point of time

SAFE & SECURE: Buy or sell gold ETFs easily and safely and store gold ETF in Demat account unlike physical Gold on the stock exchanges, and buy or sell gold ETFs at any given point of time

HEDGE AGAINST INFLATION: Safeguard yourself from inflation and currency

fluctuation by investing in best gold ETFs in India

 

S.NO ETF SCRIP NAME BOMBAY STOCK EXCHANGE SCRIP ID
1 AXIS GETF AXISGOLD
2 BIRLA SUN LIFE GETF BSLGOLDETF
3 CANARA ROBECO GETF CRMFGETF
4 ICICI PRUDENTIAL GETF ICICIGOLD
5 IDBI GETF IDBIGOLD
6 HDFC GETF HDFCMFGETF
7 KOTAK GETF KOTAKGOLD
8 INVESCO GETF(RELIGARE INVESCO GOLD ETF) IVZINGOLD
9 QUANTUM GETF QGOLDHALF
10 NIPPON INDIA ETF GOLD BEES GOLDBEES
11 SBI GETF SETFGOLD
12 UTI GETF GOLDSHARE
13 MOTILAL OSWAL - GOLD ETF*** MGOLD

2.0 REVIEW OF LITERATURE

Extensive research has been done in the field of Gold ETFs. Research focus primarily on these securities behavior and pat terns of movement, although much research is needed on the basis of the risk measurement tools. Following studies with their findings, the preceding studies are listed below:

 

Zheng et al. (2013) find significant impact of liquidity and fund size on the China Region ETF prices.  They also examine the performance of stock markets both in US and Shanghai Stock Exchange (SSE) and find that the US market performance has significant impact on ETF prices, while the SSE does not have any significant impact on ETF prices. Martinez et al. (2013) shed light on the excessive price volatility and the disparity in value between the hedge funds and their net asset values.  We further investigate the relationship between return volatility, trade size and order imbalance for foreign ETFs. The study finds that even after regulating the difference in order, the amount reflected by the number of transactions has an important and positive impact on the volatility of ETF prices. Singh and Nadda (2013) have concluded in their article that exposure to gold is less than one third of the investment risk on the stock exchange. we have agreed that investors do not have to time the market to invest in gold, understand the complex business environment and take advantage of the multiple financial opportunities’ that would otherwise be available if we were to invest in stock market. Gold ETF returns are directly linked to gold returns, as the investors will invest in the gold ETF rather than in jewellery and other gold styles. Jayanthi, and Radhulja and Malathy (2013) In this article Gold ETFs Provide an advantageous and safe way for investors to make investments that allow them to distinguish. Yet the analysis showed that a large number of gold ETFs currently on the market vary significantly from real gold returns. We explored this topic further in the industry. The Gold ETF value should also be increased or reduced by the increase or decrease in gold prices. The net asset estimate from Gold ETFs however gives an inaccurate picture. Therefore, it was pointed out at this point that Gold ETFs ended up being an excellent investor investment option

 

Small et al. (2012) address the impact of the concentration of protection on the Exchange Traded Funds ' adverse collection costs and liquidity. The study finds that unfavorable selection costs increase the number of shares held in the underlying portfolio and that unfavorable selection costs do not change if the stocks are raised. Haga et al. (2012) evaluate the Norwegian leveraged ETFs and consider these funds are using futures to provide the necessary 

returns to investors. The study finds that the leveraged ETFs have fallen short of achieving the expected returns and ends by suggesting that the futures position these funds take is too low to get the pictured returns. DeFusco et al. (2011) measured price deviations of three of the most liquid ETFs from the underlying index average.  We analyze the deviations in prices of Spider, Diamonds and Cubes and conclude that the variance in prices is normal and these deviations are to be viewed as additional costs for the ETF. Charupat et al. (2011) speak about leveraged exchange traded funds pricing and results. The paper discusses the features of the leveraged ETFs, trading figures, market performance and monitoring errors.  We note that the leveraged ETFs are exchanged by retail investors with very short holding periods, and also find that the leveraged ETFs premium for bull and bear differ. Wong et al. (2010) Analyze ETF results from seven countries and compares the performance of both bullish and bearish markets in terms of risk and return. The analysis measures the errors in monitoring and ETF returns. The study uses the results of Jensen alpha and Sharpe’s ratio to identify the ETFs.The paper notes that the alpha and risk premium for Jensen are higher for bullish markets relative to bearish markets

Madura et al. (2008) analyze whether market performance indicators are also performance indicators for the ETFs. The study finds that the indicators are not as useful as they were for the individual stocks when ETFs are further categorized into general, international and sector, and the study attributes further that these variations are due to the characteristics of ETFs. Engle et al. (2006) analyze a wide range of ETFs for the premium and discounts. The study finds the premiums (discounts) for domestic ETFs are lower and higher for the foreign ETFs.  The study also finds that although international ETFs are less traded and priced less precisely, they operate in a strict environment.

 

3.0 STATEMENT OF PROBLEM

Several forms of gold ETFs are present. It is also hard for investors to make an appropriate investment decision within the gold fund. Investors are being seen struggling to find an acceptable gold fund for their portfolio. This research aims to recommend effective methods and criteria for choosing suitable gold funds for their investment portfolio.

 

4.0 OBJECTIVES

      I.To study the financial performance of Gold ETFs in comparison to BSE

    II.To Analyze Gold ETF vulnerability behavior.

 

5.0 RESEARCH METHODOLOGY

This research is limited to Gold ETFs only and which are traded on BSE. Presently there are 12 funds which are listed on BSE. The related secondary data was obtained from the BSE website to attain the study's objectives. The sampling period is 2010 to 2019. The survey duration is selected in such a way as to include the maximum number of Gold ETFs in the analysis. Second, this period witnessed a dramatic rise in demand from Gold ETFs and the gold. The study uses various financial measures such as standard deviation, alpha, beta, Sharpe and Trey nor ratio, which are described as follows: (a) Sharpe's index, (b) Trey nor portfolio index (c) Jensen measure index (d) Standard Deviation (e) Beta

 

Measurement of Sharp index ratio

The Sharpe ratio calculates the equity risk premium relative to the total portfolio risk. The index of the Sharpe is calculated as;

Sharp ratio  = ( Average return on portfolio - Risk free rate )/

Standard deviation of  portfolio

S = RP-RF /σp Where, S = Sharpe index

RP= Average yearly return on fund

Rf = Risk free rate

*Risk free rate is taken as 6 % P.A

 

Treynor’s ratio

Treynor's Ratio as calculated by portfolio beta coefficients provides a portfolio performance index that is based on systematic risk. it is used to rate the value of interest on different assets. it is a risk-adjusted rate of return calculation that is calculated by dividing the asset risk premium by its beta coefficient.

Tn  = RP-RF /βp Where

Tn= Treynor's index

RP= Average yearly return on fund

Rf = Risk free rate

βp= Beta coefficient of portfolio

 

Jensen performance index

The Jensen ratio calculates how much of the return rate of the portfolio is due to the capacity of the manager to produce above average returns that are adjusted to market risks.

Alpha =  (R (i ) - ( RF + β*(RM-RF))

Where Ri = The Realized return of the portfolio or Investment

RM = The Realized return of the appropriate market index

RF = The Risk - Free rate of the Return for the time period

β =   the beta of the portfolio of investment with respect to the chosen

market index  

 

Standard deviation:

It is used to calculate the variance in individual return over a given period from the expected average return. Within the risk 

definition of an investment portfolio standard deviation is used. Lower the standard deviation means further fluctuation in expected returns.

 

Beta

Beta tests the systemic risk and shows how the security price is responding to the demand. It is determined by related protection return with market return.

 

Table 1.2: Descriptive Statistics
  Mean S.E of Mean Median S.D Minimum Maximum
AXIS GOLD ETF 0.0389152 0.04197773 0.0520044 0.11873096 -0.10891 0.22427
BIRLA SUNLIFE GETF 0.0415081 0.04028367 0.0479207 0.11393943 -0.09360 0.22139
CANARA ROBECO GETF 0.0215129 0.04466727 0.0269269 0.11817848 -0.10600 0.21762
ICICI PRUDENTIAL GETF 0.0290571 0.04452540 0.0115385 0.11780313 -0.09867 0.22925
IDBI GETF 0.0416858 0.03927745 0.0684986 0.11109342 -0.10401 0.21342
HDFC GETF 0.0411668 0.04062901 0.0502799 0.11491621 -0.10013 0.22289
KOTAK GETF 0.0857514 0.04502106 0.0919869 0.14236911 -0.09611 0.29988
INVESCO GETF 0.0468852 0.05259412 0.0570071 0.14875863 -0.15441 0.24131
QUANTUM GETF 0.0400492 0.03933547 0.0472537 0.11125751 -0.10165 0.22441
NIPPON INDIA ETF GOLD BEES 0.0405651 0.04012935 0.0459604 0.11350295 -0.09449 0.22761
SBI GETF 0.0294202 0.04489587 0.0422063 0.11878332 -0.09029 0.23512
UTI GETF 0.0848900 0.04386307 0.0898500 0.13870720 -0.14110 0.29660
BSE SENSEX 0.1024700 0.05317873 0.1167690 0.16816590 -0.24644 0.29894
Table 1.3: Relationship on risk and return
Beta S.D Average returns
AXIS GOLD ETF -0.0166941 0.11873096 0.0389152
BIRLA SUN LIFE GETF 0.00992142 0.11393943 0.0415081
CANARA ROBECO GETF -0.1117842 0.11817848 0.0215129
ICICI PRUDENTIAL GETF -0.1385836 0.11780313 0.0290571
IDBI GETF 0.20544131 0.11109342 0.0416858
HDFC GETF 0.03221523 0.11491621 0.0411668
KOTAK GETF -0.284148 0.14236911 0.0857514
INVESCO GETF -0.0002594 0.14875863 0.0468852
QUANTUM GETF -0.0065163 0.11125751 0.0400492
NIPPON INDIA ETF GOLD BEES 0.00523532 0.11350295 0.0405651
SBI GETF -0.0325355 0.11878332 0.0294202
UTI GETF -0.0021569 0.1387072 0.08489
Sensex 1 0.168166 0.10249986
Table 1.4: sharp performance measure index
  sharp ratio Rank S.D
INVESCO GETF 0.18087772 1 0.142369
UTI GETF 0.17944274 2 0.138707
KOTAK GETF -0.088161608 3 0.148759
BIRLA SUN LIFE GETF -0.162295879 4 0.113939
IDBI GETF -0.163886366 5 0.114916
ICICI PRUDENTIAL GETF -0.164854048 6 0.111093
QUANTUM GETF -0.171228149 7 0.113503
AXIS GOLD ETF -0.177584684 8 0.118731
NIPPON INDIA ETF GOLD BEES -0.179320929 9 0.111258
SBI GETF -0.25744187 10 0.118783
HDFC GETF -0.262666196 11 0.117803
CANARA ROBECO GETF -0.325669276 12 0.118178
(Source computed from secondary data)
Table 1.5: Treynor’s performance index
Scrip Teynor ratio Rank Beta
AXIS GOLD ETF 1.263007652 3 -0.0167
BIRLA SUN LIFE GETF -1.86383599 10 0.00992
CANARA ROBECO GETF 0.344298192 5 -0.1118
ICICI PRUDENTIAL GETF 0.22327959 6 -0.1386
IDBI GETF -0.089145656 7 0.20544
HDFC GETF -0.584605517 9 0.03222
KOTAK GETF -0.09062673 8 -0.2841
INVESCO GETF 50.55720263 1 -0.0003
QUANTUM GETF 3.061689659 2 -0.0065
NIPPON INDIA ETF GOLD BEES -3.712263025 11 0.00524
SBI GETF 0.939890193 4 -0.0325
UTI GETF -11.53947027 12 -0.0022
(Source computed from secondary data)
Table 1.7: Overview of the ranks of Sharpe, Treynor and Jensen for Performance Measures of Gold ETFs
Sharp Rank Teynor Rank Jensen Rank
AXIS GOLD ETF 8 3 8
BIRLA SUN LIFE GETF 4 10 4
CANARA ROBECO GETF 12 5 12
ICICI PRUDENTIAL GETF 6 6 9
IDBI GETF 5 7 10
HDFC GETF 11 9 7
KOTAK GETF 3 8 1
INVESCO GETF 1 1 3
QUANTUM GETF 7 2 6
NIPPON INDIA ETF GOLD BEES 9 11 5
SBI GETF 10 4 11
UTI GETF 2 12 2