Swamped by unprecedented demand for a safe-haven asset, BlackRock ( BLK ) on Friday temporarily halted issuing new shares in the second-largest ETF backed by physical gold.
The move impacts the primary market, specifically the ability of authorized participants to create new shares in iShares Gold Trust ( IAU ). These market participants play a key role in providing ETF liquidity and keeping share prices close to net asset value.
Basically, the ETF's sponsor ran out of its allotment of share creations. IShares announced that it is in the process of registering new shares with the Securities and Exchange Commission (SEC). That would allow the $8 billion ETF's normal trading mechanism to resume. It is expected to happen within three business days.
Here are three key things for ETF investors to know:
Retail and institutional investors will still be able to buy and sell as normal but need to tread with caution.
"Investors tend to look at expense ratio and trading costs, but paying more than the value of securities is worth can eat into returns," he cautioned.
IAU was trading at a 0.91% premium intraday vs. 0.04% for SPDR Gold Shares ( GLD ).
Both ETFs hit new 52-week highs in Friday's session.
The liquidity issue is not affecting all other sponsors of gold ETFs.
For GLD, the most popular ETF backed by physical gold, it's business as usual.
"Today, GLD remains liquid, and we believe that it has ample shares for our authorized participants," said a spokesman for World Gold Trust Services, which sponsors the $32 billion ETF.
"We actively monitor our creations and redemptions to see that GLD's registered shares are not exhausted," he added.
GLD debuted on the elite IBD Leaderboard today, the second ETF ever to do so.
Some industry experts suggest that the IAU share-creation issue was avoidable.
"We think BlackRock should have been prepared for the persistent demand for commodity ETFs," said S&P Global Market Intelligence's Rosenbluth.
February marked IAU's largest creation activity in the last decade, according to iShares. The huge spike came as IAU gathered assets at a furious pace in February.
IAU absorbed $887 million in new investor money last month. Year to date, it has seen roughly $1.4 billion in net inflow.
Could the pricing issue dent demand for IAU?
"This likely will cause investors to choose peer GLD more, despite its higher expense ratio," said Rosenbluth, while adding that the strong iShares brand is unlikely to be hurt by this hiccup for its gold-backed ETF.