How Gold Fund 'GLD' Can Become World's Largest ETF

This year's biggest attraction in the ETF world just keeps getting bigger. As reported on ETF.com, $12.2 billion flowed into the SPDR Gold Trust (GLD | A-100) through the end of June, the most of any exchange-traded fund by far.

That, in combination with a 27.6% increase in gold prices, has boosted GLD's asset above $40 billion, making it the sixth-largest ETF in the world, according to FactSet data.

While that's an impressive position, GLD still has a ways to go to reach the ETF zenith, a position it once briefly held in August 2011. At that time, the gold trust had about $77 billion in assets, more than the $74 billion that was in the SPDR S&P 500 ETF (SPY | A-97).

It was a perfect storm for GLD. Gold prices peaked at a record of more than $1,900/oz at the same time the S&P 500 plunged almost 20% on the back of the eurozone sovereign debt crisis, which was raging at the time.

A downgrade of the United States' sovereign credit rating from AAA to AA+ by Standard & Poor's around the same time only added fuel to GLD's fire.

Assets Nearly Double In 6 Months

Following the 2011 peak, GLD faced a difficult period. A combination of massive outflows and plunging gold prices sent assets under management in the fund below $22 billion by December 2015.

But in the last six months, there's been a remarkable comeback for the gold ETF, with assets nearly doubling. That raises an interesting question: Can GLD become the world's largest ETF again?

Of course, unless you're State Street, or the World Gold Council, which manages and sponsors the fund, it really doesn't matter what the answer to that question is. For the rest of us (especially the ETF nerds), it's simply a fun hypothetical to ponder.

Rosy Scenario

Currently, five ETFs stand between GLD and the No. 1 position, with assets ranging from $46 billion to $176 billion. SPY―the ETF that GLD briefly eclipsed in 2011―is at the top of the heap, followed by the iShares Core S&P 500 ETF (IVV | A-97) at No. 2, as can be seen from the table below:

Source: FactSet

Assuming gold prices continue to ascend, and GLD continues to gather assets at a rapid rate, the fund could climb quickly up the list.

Consider an optimistic scenario in which investors add another $12 billion of fresh money into the fund in the next six months, repeating what they did in the first half of the year. Then assume that gold prices rise another 25% by year-end to around $1,650.

Under those highly optimistic conditions, GLD's assets could top $65 billion, making it the third-largest ETF in the world based on the current asset totals for the other large ETFs on the list.

But if we go further in this rosy scenario for gold, and assume that the stock market drops―say, by 10- 20%―that could push assets for SPY and VOO significantly lower. VOO's assets would likely drop below that of GLD in this case, though SPY's would still retain its No. 1 position, with assets well north of $100 billion.

Chart courtesy of StockCharts.com

Difficult, But Not Impossible To Pass SPY

There's no question that it's a long shot that such a scenario plays out in the next six months. However, if we extend the timeline to one year, two years or more, it's certainly possible for GLD to become one of the top two largest—or even the largest—ETF in the world.

It will be particularly interesting to see what happens to gold when the next recession inevitably hits the U.S. economy.

If the 10-year bond yield in the U.S. drops below 1%, pushing investors into gold and fueling prices for the yellow metal to record highs at the same time that the stock market drops 20% or more, it's not inconceivable for GLD's assets to top $100 billion.

That still may not be enough to surpass the behemoth that is SPY, but it would be close.

Contact Sumit Roy at [email protected].