Three key factors to consider before choosing a Gold or Silver exchange-traded fund (ETF)

Exchange-traded funds (ETFs) have become a popular option for investors who want exposure to markets without spending time researching individual stocks. For those interested in precious metals, gold and silver ETFs offer a convenient way to invest without physically buying or storing the metals.

An ETF is a type of mutual fund that is listed and traded on stock exchanges, allowing investors to buy and sell units during market hours just like shares. These funds typically track an index or the price of an underlying asset.

1. Expense ratio

The expense ratio represents the annual fee charged by the fund to manage the ETF. Even though the difference between expense ratios may appear small, it can affect returns over the long term. Since most gold and silver ETFs hold similar underlying assets, choosing a fund with a lower expense ratio can help improve overall investment returns.

2. Tracking error

Tracking error measures how closely an ETF follows the price of its benchmark, such as the market price of gold or silver. A lower tracking error indicates that the ETF is effectively replicating the metal’s price movements. Higher tracking error can occur due to factors like transaction costs, cash holdings or the timing of portfolio adjustments.

3. Liquidity

Liquidity refers to how easily investors can buy or sell ETF units in the market without causing significant price changes. ETFs with higher trading volumes generally offer smoother transactions and narrower bid-ask spreads, making it easier for investors to enter or exit positions.

To choose the right ETF, you should consider a few key factors. First, look at the tracking error. Second, check the expense ratio, since lower costs can help improve your returns over the long term. Finally, evaluate the liquidity and trading volume, as higher liquidity makes it easier to buy or sell the ETF without facing a large bid-ask spread.

Satish Dondapati said that to choose the right ETF, investors should consider a few key factors. First, they should check the tracking error, as a lower tracking error indicates that the ETF closely follows its benchmark index. Second, investors should review the expense ratio, since lower costs can help improve long-term returns. Finally, they should evaluate the liquidity and trading volume, as higher liquidity makes it easier to buy or sell the ETF without facing a large bid-ask spread.

Meanwhile, from 1 April 2026, the Securities and Exchange Board of India (SEBI) will change how Gold and Silver ETFs are valued. Earlier, mutual funds calculated the value of physical gold and silver using the London Bullion Market Association (LBMA) AM fixing price, which then had to be adjusted for currency conversion, transportation costs, customs duty, taxes, and other local factors. Under the new rule, ETFs will instead use polled spot prices published by recognised Indian stock exchanges, which reflect actual domestic market prices.