Did IAU Just Steal $59 Million From GLD?


It's too early to call it a trend, but it's tempting to see one after ETF-share creations last Friday on iShares' Comex Gold Trust (NYSEArca:IAU) fund were virtually identical to redemptions on State Streets' SPDR Gold Shares ETF (NYSEArca:GLD).

Net flows into the iShares ETF on July 9 were $59.2 million, a 2 percent increase, which raised total assets after market movement to $3.47 billion, according to data compiled by IndexUniverse.com. Outflows from GLD were $59.1 million, a tiny setback for the second-biggest U.S. ETF, which has more than $51 billion in assets.

The movements came about a week after iShares slashed the price of its gold fund, moving the annual expense ratio from 0.40 percent to 0.25 percent on July 1. The firm said it wanted to make the ETF more accessible at a time the metal is extremely popular among investors. Up until the price cut, both IAU and GLD both cost investors 0.40 percent a year. In his blog last week, Matt Hougan predicted a cheaper IAU might well steal market share from GLD.

Gold has been a hot safe-haven investment this year since fiscal problems in Europe began to create renewed uneasiness about the fragile state of the global economy. IAU rose more than 13 percent in the first half, and has more than tripled since it was rolled out in January 2005, riding a bullish commodity wave that's been building for the past 10 years.

IAU settled on Friday at $11.84, a price that reflects a 1-for-10 share split on the ETF that New York-based BlackRock has said was part of its plan to make the ETF more attractive to potential investors. The split was effective June 24.

"Clearly, the share split and the lowering of the expense ratios has appealed to investors at this juncture," Paul Weisbruch, an ETF trader with King of Prussia, Pa.-based Street One Financial, said in an e-mail interview. "But it would be shortsighted to believe that State Street could not respond quickly with two similar moves on their own in order to protect their market share."

Another competitor in the world of U.S. gold ETFs, ETF Securities' Physical Swiss Gold Shares (NYSEArca:SGOL), charges an annual management fee of 0.39 percent. Weisbruch added that it's entirely possible that ETFS will join the fray and cut costs on SGOL, especially considering the success it's had so far in gathering assets since it launched the gold ETF last year.

Too Early To Tell

Cutting the price of IAU by 37.5 percent was a splashy move by BlackRock, but investors aren't necessarily going to flock to it because it's cheaper than either GLD or SGOL.

First, there are trading costs to consider, which can add up quickly for those who trade GLD heavily, thus obviating any long-term savings associated with the lower expense ratio. And there are quite a lot of traders who do buy and sell GLD. The gold ETF's turnover in June was more than $39 billion, the fifth-most traded of all U.S. exchange-traded funds, according to IndexUniverse.com data.

Weisbruch acknowledged that commissions could be a factor that could increase overall expenses, but also downplayed their overall significance. He said some institutional clients who pay per-share commissions could feel the pinch, but retail clients, especially those online who pay commissions on a per-trade basis, wouldn't really be affected.

Another important variable that could slow IAU's quest for market share is taxes. Commodities, such as gold, and ETFs that hold gold, are taxed as collectibles, meaning even long-term holders of funds like GLD don't qualify for long-term capital gains tax treatment, and instead have to pay ordinary tax rates of up to 28 percent. That could easily be a deterrent that trumps any cheaper expense ratio for a selling GLD holder who might face such a tax bill.

Still, someone made that switch on Friday, and it could be the beginning of a trend.

"What is interesting about this is that GLD and IAU, as far as from an underlying standpoint, have always been equally as liquid," Weisbruch said. "But now that IAU should trade more volume, and the lower price of the ETF will cause bid/ask spreads to shrink, the appearance of more liquidity is there, which has obviously swayed some investors as well."

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: GLD , IAU , SGOL



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