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
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
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
2010 Index Publications LLC
. All Rights Reserved.