Fee Wars Shake Up Gold ETFs

Investors have taken a shine to the GraniteShares Gold Trust (BAR).

On Friday, BAR picked up $130 million in new net inflows, then $13 million on Monday, according to data from the issuer. That puts BAR's total assets under management at $157 million—a massive jump for a fund with only $13 million in assets, as of this time last week.

Meanwhile, the SPDR Gold Trust (GLD), the world's largest bullion-backed gold ETF, saw outflows of $445 million on Friday, suggesting that at least some of BAR's new money came from investors who'd previously held GLD.

The reason investors switched isn't difficult to pinpoint: GLD is twice as expensive as BAR, with an expense ratio of 0.40%, compared to BAR's 0.20%.

Throw in a month of lousy returns for the underlying metal—the gold price has dropped 4.6% since April—and some big investors spotted an opportunity to harvest losses and move their gold allocation into a cheaper fund, says Will Rhind, founder and CEO of GraniteShares.

"It's difficult to justify using a more expensive product for gold, especially as a fiduciary," he said.

GLD Loses Ground

Before BAR debuted, the iShares Gold Trust (IAU) had been the cheapest bullion-backed fund, with an expense ratio of 0.25%.

Since IAU dropped its price in 2010 from 0.40% to 0.25%, however, the fund has steadily eroded market share from GLD. In 2010, GLD accounted for roughly 88% of all gold ETF assets; today, it accounts for just 56%.

Even today the erosion continues: Over the past 12 months, GLD has seen net outflows of $293 million, whereas IAU has seen net inflows of $3.5 billion.

Now there's BAR, which, as the cheapest ETF on the market, may in turn end up stealing market share from the stealer. Case in point: On the same day BAR saw its massive $130 million creation, IAU had no new net asset inflows.

Cost Matters To Gold Investors

Fees matter so much in the gold ETF market because, aside from cost, there's very little to differentiate physically backed ETFs.

All bullion-backed gold ETFs hold physical gold bars in a vault somewhere, meaning they track the gold spot price, rather than a proprietary index.

Many of the distinguishing features of each fund—where the vault is located; how much gold one share of the ETF represents; how each bar is tracked and accounted for—end up being relatively minor details for most investors, to whom costs and liquidity matter far more.

Even name brand apparently has limited appeal, thus opening the doors to a cost-cutting newcomer like GraniteShares.

Game-Changer For GraniteShares?

BAR, now by far GraniteShares's largest ETF, could be a game-changer for the startup ETF issuer, which has struggled to accrue significant assets in its lineup of mostly low-cost commodity ETFs.

Many investors tend to shy away from investing in newer ETFs until those funds surpass certain liquidity thresholds, such as $100 million in assets under management, or until they establish a long-enough track record. BAR, however, has solid liquidity, with $9 million in average daily volume and a 0.04% spread—half the spread of the much larger IAU. It has also been on the market for almost a year.

"There are investors crying out for new products and actively looking to invest in emerging managers," Rhind said. "BAR works for those people, because it provides an institutional solution for a fraction of the cost."

Furthermore, on a year-to-date basis, BAR has outperformed both IAU and GLD, dropping 0.93% compared with IAU's 0.96% and GLD's 1.04%. Notably, this performance differential—0.03% for BAR and IAU, and 0.11% for BAR and GLD—corresponds to roughly half the differential in annual expense ratios between BAR and its competitors. This means BAR's relative outperformance over the past half year is almost certainly a direct result of its cheaper price tag.

New Cheaper Competitor?

As the fee war rages on, the World Gold Council—the firm behind GLD—isn't remaining on the sidelines. Last November, WGC filed for a new physically backed gold ETF similar to its existing product.

The fund—which appears to have no connection to State Street Global Advisors, the firm that runs GLD—will carry a price tag of 0.25%, reported Reuters in May. That would put the new ETF in direct competition with IAU.

However, it would still leave BAR as the cheapest-in-class option.

Contact Lara Crigger at [email protected]