Gold Shares Dominate ETF Flows For December

January 31, 2006

Citigroup's December ETF report offers a sneak peak at investor sentiment. We ask: Are ETF investors driving up the price of gold?

The streetTRACKS Gold Bullion exchange-traded fund (ETF) posted the highest net inflows of any ETF for December, vacuuming up more than $550 million in assets, according to the Citigroup ETF Monthly report.  Returns on the ETF topped more than 5 percent for the month, as gold surged towards a new twenty+ year high.

Fund flows are so strong into the gold ETFs that they've created a bit of reflexivity in the market. GMSF Ltd., a precious metals consultancy, recently reported a global gold supply deficit for 2005 totaling 468 tons. The group attributed the deficit to three things: production that has remained constant; a 5 percent rise in jewelry demand; and a "strong increase in investment demand," with investor demadn more than doubling in the past year, thanks in large part thanks to the gold ETFs. It's a virtuous circle if you're a gold investor.

The trend is catching fire across the precious metals industry:Silver prices have been perking up recently in anticipation of a silver bullion ETF launch from iShares, although the SEC could still nix that product.

Looking beyond gold, the broader ETF industry posted net asset flows of $5.3 billion in December, a decent number, but down sharply from the $13.7 billion onslaught in November, and the $10 billion that entered the ETF market in October.

On a capitalization basis, investors continued their recent move out of small caps and into large names, with more than $770 million fleeing the small cap sector and $1.26 billion flowing into large caps - despite the fact that traders pulled more than $500 million out of the SPY (S&P 500) ETF.

On a sector level, Energy attracted the bulk of assets, with nearly $400 million flowing into the sector.  Meanwhile, investors pulled money out of the previously red-hot Utilities sector, with more than $200 million exiting for greener pastures. You can't blame the Utilities ETFs for the loss - they turned in a fine performance, rising 0.89 percent for the month to be the 4th best performing sector.

Best Performing Sector, December
Sector

# of Funds

December Avg. Return (%)

Materials

3

2.36

Health Care

7

2.22

Energy

7

2.17

Utilities

4

0.89

Industrials

6

0.64

Financials

9

0.25

Consumer Staples

4

(0.00)

REITS

4

(0.02)

Consumer Discretionary

6

(0.32)

Information Technology

13

(1.62)

Telecom

3

(1.84)

Source: Bloomberg and Citigroup Investment Research.

International ETFs had another excellent month, with every single fund posting positive returns in December. Results were led by the iShares MSCI South Africa fund (EZA), which rode a strong exposure to gold to a hefty 11.69 percent return.  Brazil - that darling of international investors - was the dog of the month, returning just 0.44 percent on the iShares MSCI Brazil Fund (EWZ)

Best Performing International ETFs

Fund

Ticker

% Return December

iShares MSCI South Africa

EZA

11.69

iShares MSCI South Korea

EWY

10.35

iShares MSCI Japan

EWJ

8.97

Vanguard Pacific VIPERs

VPL

8.48

iShares S&P/TOPIX 150

ITF

8.10

iShares MSCI Sweden

EWD

7.60

Vanguard Emerging Markets VIPERs

VWO

6.54

iShares MSCI Taiwan

EWT

6.29

iShares MSCI Emerging Markets

EEM

6.10

iShares MSCI Netherlands

EWN

5.80

Source: Bloomberg and Citigroup Investment Research.

Investors in fixed-income ETFs also did well, with all fixed-income products posting positive returns. That was decidedly not the case of high-yield equity funds, however, as only one of the six dividend funds posted positive returns (the PowerShares International Dividend Achievers Portfolio, up 2.57 percent).

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