Gold ETF Flows Shift Course

July 26, 2018

Physical gold ETFs, like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), have been bleeding assets over the past several months, even as gold miner stock ETFs have pulled in millions in new net inflows.

From April 1 to July 24, the 11 physical gold ETFs saw a combined $2 billion in outflows. Most of that came from the $31.7 billion GLD, which lost $1.7 billion over the period; and IAU, which lost $330 million and has $10 billion in assets under management.

At the same time, gold miner ETFs, led by the VanEck Vectors Gold Miners ETF (GDX) and the VanEck Vectors Junior Gold Miners ETF (GDXJ), have brought in $861 million in new net inflows. More than half of that, or 62%, went into junior gold miner GDXJ.

Reversal For IAU

For IAU, the outflows have lasted for roughly two months, breaking a 19-month streak of inflows that began near the end of 2016. Between Dec. 29, 2016 and May 5, 2018, more than $4.1 billion flowed into IAU, with only 19 days of recorded outflows:

 

Sources: ETF.com, FactSet; data as of July 24, 2018

 

GLD's flows tend to be more cyclical and variable, reflecting its usage by many traders and institutional investors as a short-term instrument rather than a buy-and-hold investment. Still, it too has seen an extended—mostly unbroken—period of outflows, starting on May 1:

 

Sources: ETF.com, FactSet; data as of July 24, 2018

 

Gold Prices Lag

The outflows in physical gold ETFs can likely be attributed to anemic gold prices, which have been trending down for the past 12 months. In particular, from April 1 to July 24—the period of outflows in GLD and IAU—the price of gold fell 7%, from $1,326.29/oz to $1,233.26/oz.

Performancewise, GLD is down 7.7% over the past three months, while IAU is down 7.6%.

Rising interest rates may also have impacted gold investment, as investors move into higher-yielding bonds and other fixed-income investments and out of gold, which offers no yield (but costs money to store and insure).

Year-to-date, however, inflows into the two major physical gold ETFs have been somewhat more positive than the past quarter's data. GLD has seen net outflows of $1.3 billion, which is less money than it has lost over the past quarter. Meanwhile, IAU has seen net inflows of $870 million, as the fund continues to chip away at GLD's market share.

Flows High For Gold Miner ETFs

May 1, the day GLD first began seeing significant outflows, was also the same day that GDXJ, the junior gold miners ETF, commenced its current streak of inflows. The two events may or may not be connected, but the timing coincidence is intriguing.

Since April 1, GDXJ has taken in $534 million:

 

Sources: ETF.com, FactSet; data as of July 24, 2018

 

Meanwhile, GDX, which focuses on larger gold miners, has also experienced a string of inflows, starting at the beginning of June. Since April 1, GDX has taken in $344 million. That figure would have been larger if not for a day of significant outflows on July 10, in which investors pulled $208 million from the fund:

 

Sources: ETF.com, FactSet; data as of July 24, 2018

 

Year-to-date, GDX has taken in $1.4 billion in new net investment assets, while GDXJ has taken in $614 million.

Investors may be turning to gold miners for performance reasons. Gold miner stocks blend the characteristics of gold and equities, and can often act like a leveraged play on both.

Over the past three months, GDX is down 4.8%, while GDXJ is down 3.4%. Neither return is great, but both funds are still outperforming the big two physical gold ETFs by several percentage points.

 

Source: StockCharts.com. Data as of July 25, 2018.

 

Geared Gold Funds Trading High

Leveraged gold miner ETFs have also seen marked increases in investor interest. Year-to-date, the Direxion Daily Gold Miners Index Bull 3x Shares (NUGT), which provides 3x leveraged exposure to the same index as GDX, has pulled in $378 million in net inflows.

Meanwhile, the Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG), which provides 3x leveraged exposure to the same index as GDXJ, has brought in $213 million.

Flows into leveraged ETFs tend to be more volatile, considering that these trading instruments track multiples of the daily returns of their underlying index and are therefore not suitable for long-term investment.

To that point, on July 17, when the gold price dropped 1% over the course of a few hours, NUGT traded more than 80 million shares in one day, worth more than $1.8 billion. That was more than 10 times its average daily turnover over the past year.

Newcomer Slowly Gaining Ground

Other physical gold ETFs haven't seen much in the way of inflows over the past few months. That includes the GraniteShares Gold Trust (BAR), which experienced an influx of $250 million back in June, but has seen few inflows since (read: "Fee Wars Shake Up Gold ETFs").

In part, that could be due to the launch of the SPDR Gold MiniShares Trust (GLDM) on June 25. The ETF, a cheaper version of GLD that holds roughly the same amount of gold per share as IAU, carries an expense ratio of 0.18%, meaning that GLDM undercuts BAR, the former cheapest-in-class, by 0.02%.

Fees can make or break a gold ETF, because aside from cost, little differentiates bullion-backed ETFs. Many of the distinguishing features of each fund—where its gold is vaulted; how much metal one share represents; how each bar is tracked and accounted for—wind up being relatively minor details to most investors, who are more concerned with cost and liquidity.

Since its inception, GLDM has pulled in $65 million in new net inflows. BAR, on the other hand, has pulled in only $6.3 million.

Contact Lara Crigger at [email protected]

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