Introducing Zerodha Gold ETF in Windmill Capital’s Asset Allocation smallcases
The current gold exposure in most of our ETF-based asset allocation portfolios is via Nippon India ETF Gold BeES and SBI Gold ETF. With our latest rebalance, we are shifting this exposure to the Zerodha Gold ETF (GOLDCASE).
The reason is straightforward: Nippon India’s Gold ETF has an expense ratio of 0.8%, SBI Gold ETF’s expense ratio is 0.7%, while Zerodha’s is only 0.3% – the lowest in the industry. Although this difference may seem minor, it accumulates over time and can greatly affect long-term investment performance by lowering the impact of fees on your portfolio.
For example, this difference of 0.5% between expense ratios can potentially generate an additional return of ~5% over the next decade, without including any compounding effect. If one assumes that Gold will generate a CAGR of 10% over the next decade, this expense ratio difference can potentially generate an additional return of ~12%.
Why Now?
We are making this change now versus earlier, as at the time of launch of these asset allocation portfolios, a very limited universe, i.e. a few gold ETFs like Nippon India ETF Gold BeES and SBI Gold ETF, had good liquidity. Now, with the increase in traded volumes of Gold ETFs on the exchange due to higher investor participation, most Gold ETFs have developed good liquidity, including Zerodha Gold ETF.
Thus, to ensure that new investors in our portfolios do not pay a higher expense ratio for the same exposure, we are making this change.
Considerations for Existing Investors
Selling your Gold ETF holdings, whether it’s Nippon India Gold BeES or SBI Gold ETF, could result in a taxable capital gains event. If you have been holding these ETFs for less than 12 months, you would need to pay short term capital gains tax (20% of the ETF profits) vs long term capital gains tax (12.5% of the ETF profits) when you file taxes for the financial year.
In the long run, ongoing cost savings from the lower expense ratio could justify advancing the tax liability ahead. It is important to note that there is no additional tax liability; rather, you are paying it earlier compared to later.
However, if you don’t want to trigger a tax event, you can customise the smallcase during the rebalance process and continue to hold Nippon India ETF Gold BeES/SBI Gold ETF in the same proportion as recommended for Zerodha Gold ETF. As always, rebalancing a smallcase is completely in your control. If you want to prioritise delaying the tax event to a later date, you just need to customise the rebalance – as explained in the link provided above.
Please note that all these ETFs provide the same Gold Exposure.
For New Investors
For new investors, it’s straightforward to go with the latest recommendation of investing via the Zerodha Gold ETF and save on the ETF expense ratio.
For Existing Investors
For existing investors, it’s a choice between future savings in ETF fees and paying capital gains tax early. Irrespective of the choice that existing investors make, they will continue to have access to the core asset allocation strategy and receive all future rebalance updates.
Disclosure: Zerodha Gold ETF (GOLDCASE) is a product of Zerodha Mutual Fund. Windmill Capital’s holding company – CASE Platforms Private Limited (CPPL) is a shareholder in Zerodha Asset Management Private Limited (Zerodha AMC), which is the asset manager for Zerodha Mutual Fund. Windmill Capital states that its research recommendations are made independently and objectively based on their merits and suitability without any influence due to CPPL being a shareholder in the Zerodha AMC.
Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.
Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.
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