The Nairobi Securities Exchange recently introduced the listing of a different Asset Class on the Exchange, Gold, through an Exchange Traded Fund commonly referred to as ETF.
What is an Exchange Traded Fund (ETF)?
“An ETF is marketable security that tracks an index, a commodity, bonds or a basket of assets like an index fund. Unlike mutual funds (unit trusts), an ETF trades like a common stock on a stock exchange.
ETF prices change throughout the day as trading activities of buying and selling go on. ETFs typically have higher daily liquidity (easy entry and exit) and lower fees than your Unit Trusts shares, thus being attractive to the investor.” (Investopedia)
The video below by MoneyWeek further explains the concept of ETFs:
What is a Gold ETF?
A Gold ETF is an instrument that either tracks the price of Gold or invests in conglomerate of gold mining companies.
What is the Barclays NewGold ETF?
The Barclays NewGold ETF is an instrument that tracks the price of gold in line with the international markets. It is listed on the Nairobi Securities Exchange and trades under the symbol GLD. Any local investor can purchase it through placing an order through their stockbroker.
If an investor buys the security/share of the NewGold ETF he is effectively buying approximately 1/100th of an ounce of Gold which is held in a secure depository on behalf of investors and is backed by physical gold.
Benefits of Investing in a Gold ETF
An investor doesn’t go through any premium charges as it is when currently buying gold coins, jewelry or gold bars.
The returns on a gold ETF are quite similar as if investing in physical gold. The threat of your gold being stolen is significantly negated.
From time to time, there comes a time when your local jeweler, dealer or bank will refuse to purchase your gold for various reasons, liquidation of the asset may prove to be quite difficult. In such situations if you owned a gold ETF you could easily go to your stockbroker and place a sell order and you are done.
Investing in physical gold comes with various associated storage costs that can prove to be quite expensive and impractical for the normal retail investors. This isn’t the case when buying a gold ETF.
Gold ETFs provide liquidity and an investor can easily buy and sell them quite easily by simply placing a trade through your local stockbroker subject to the normal commissions.
Gold ETFs are truncated into small affordable units which can be easily bought and sold. This isn’t the case when buying physical gold as you have to purchase them in relatively large quantities.
Investing in ETFs offers an investor diversification to your portfolio by adding an uncorrelated asset to your holdings providing a hedge to your investment.
Disadvantages & Risks of Investing in Gold ETFs
An investor can only redeem his gold ETFs in cash as they are gold contracts and derivatives.
An investor is always exposed to general market risks i.e. general movements in local and international markets and investor sentiment which could have an impact on the price of the gold.
The value of the gold prices can be affected by the exchange rate for instance the spot Forex prices of the Kenya Shilling against the US Dollar.
There is always what we call a ‘tracking error’ which gives a slight deviation of the price of the ETF against the price of gold in the international markets.
Investors also need to be aware that various factors affect the price of Gold such as:
- Global, regional, political, economic or financial events.
- Investors’ expectations on the future rates of inflation and movements in world equity, financial and property markets.
- Global supply and demand of gold.
- Interest rates and currency exchange rates e.g. strength of the US dollar
- Investment and trading activities of hedge funds, commodity funds and other market speculators.