May 10, 2013, 11:09 a.m. EDT
‘ETF revolution’ in gold bloodies investors
Commentary: SPDR Gold’s $7 bln April outflow punishes gold bulls
SPDR funds are a family of exchange-traded funds (ETFs) traded in the United States, Europe, and Asia-Pacific and managed by State Street Global Advisors (SSgA). Informally, they are also known as Spyders or Spiders. SPDR is a trademark of Standard and Poor's Financial Services LLC,[1] a subsidiary of McGraw-Hill Companies, Inc.
The name is an acronym for the first member of the family, the Standard & Poor's Depositary Receipts, now the SPDR S&P 500 (NYSE: SPY), which is designed to track the S&P 500 stock market index. For a long time, this fund was the largest ETF in the world. SSgA also manage the SPDR Gold Shares, which for a while was the second-largest ETF in the world.[2] As of June 2012, they are fourth-largest and seventh-largest respectively.
The funds are formulated as unit investment trusts. In 2007, SSgA rebranded its other United States ETFs as SPDRs, including the StreetTRACKS family and its other flagship ETF shares, the DOW DIAMONDS (NYSE: DIA), that tracks the Dow Jones Industrial Average. This move united all U.S. ETFs managed by SSgA, a total of 23 at that time, under a single brand.[3] At the end of 2006, the total portfolio that became known as SPDRs had $102 billion of assets under management.[3]
By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — Exchange-traded funds ushered in a new era of investing in commodities, allowing everyone from avid retail investors to leveraged hedge funds to make bets on gold, silver and other hard assets without the constraints of trading in traditional futures.
But the popularity of those stocklike vehicles, credited with helping to drive commodities to record highs in the past five years, may be working against prices — and commodity investors — right now.
Gold has tumbled below $1,500 an ounce, in part due to a stampede out of SPDR Gold, the largest U.S. gold-backed ETF and a pioneer in the space. Last month, nearly $7 billion in funds left the SPDR Gold Trust GLD -0.86% .
On Friday, June gold GCM3 -1.46% dropped more than 3% to $1,421, poised for its lowest close in more than two weeks, as shares of the ETF fell 2%.
“The ETF revolution set expectations very high and brought a lot of liquidity at first” to the commodity markets, said Kevin Kerr, president and chief executive officer of Kerr Trading International. “After all, the ETFs were much more palatable to the average equity investor who wanted to steer clear of futures or physical gold and silver.”
Commodity ETP*
*Exchange-traded products
Source: IndexUniverse
| BIGGEST LOSERS | ||
|---|---|---|
| Ticker | Name | April 2013 Flows ($, M) |
| GLD | SPDR Gold | -6,774.7 |
| IAU | iShares Gold Trust | -766.4 |
| SLV | iShares Silver Trust | -214.3 |
| DBO | PowerShares DB Oil | -86.9 |
| UNG | United States Natural Gas | -67.9 |
| TOP GAINERS | ||
| GSP | iPath S&P GSCI Total Return ETN | 9.7 |
| OIL | iPath S&P GSCI Crude Oil Total Return ETN | 14.7 |
| SLVO | Credit Suisse Silver Shares Covered Call ETN | 14.9 |
| DBE | Power Shares DB Energy | 17.3 |
| PALL | ETFS Physical Palladium | 23.6 |
Source: IndexUniverse
“Unfortunately with that liquidity came many weak hands,” he said. “The recent plunge in gold prices forced many of the weak hands out of the market and key ETFs.”
Gold futures have lost about 15% year to date, with nearly 8% of that drop in April alone. Losses were blamed in large part on huge outflows from gold ETFs, as well as the lower gold forecasts from big banks.
The SPDR Gold Trust GLD -0.86% suffered net outflows of $6.77 billion in April, with losses for the year to May 8 at $14.67 billion, according to data from IndexUniverse.
For the year so far, commodity exchange-traded products, which include exchange-traded funds — an exchange-traded security that tracks a stock, sector, index or other assets classes or basket of assets — have seen outflows of $16.22 billion, with $8.08 billion of that suffered in April alone, according to IndexUniverse. In March, commodity exchange-traded products, which also include exchange-traded notes, lost $2.25 billion.
“Investors are disenchanted with the commodity ETFs and the great promise they held when they were launched,” said Kerr. “Damage has been done by the ETFs as they have dissuaded many investors from the resource space due to losses.”
Rise to fame
ETFs couldn’t have such a spectacular fall, however, if they didn’t see such a steep rise to fame. Launched in 2004, the SPDR Gold Trust has grown to become one of thelargest exchange-traded funds, with assets under management (AUM) of roughly $50 billion.
“Commodity ETFs have allowed more investors to take part of the market,” said Tom Lydon, editor and publisher of ETFtrends.com, and ETFs can offer a type of market indicator for gold-price movements.
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“Investors can gauge the popularity of gold and get a sense of how prices will hold up,” he said, pointing out that the recent plunge in gold prices occurred along with a large redemption in physical gold holdings. Read about how gold ETFs have transformed the market in 10 years.
Overall, ETFs allow investors to “quickly go in and out of tactical positions or hold onto a good portfolio diversifier for a long-term, strategic allocation,” said Lydon.
And while no other commodity ETP’s assets come close to that of gold’s, other ETPs with assets under management measured in the billions include the iShares Silver TrustSLV +0.39% , the iShares Gold Trust IAU -0.78% and PowerShares DB Commodity Tracking Fund DBC -0.45% and the PowerShares DB Agriculture Fund DBA -1.04%, according to IndexUniverse data.
“For many years in the asset-management world, commodities were viewed as a diversifying asset class, uncorrelated to stocks and bonds,” said Scott Brown, president of investment research firm Sabrient Systems, based in Santa Barbara, Calif.
Beginning in 2003, “with the start of the commodity super-cycle and the China effect, commodities and gold in particular started to become more popular investments,” he said. “Mutual fund companies and ETF providers started to create commodity-linked products for the ‘retail’ stock-owning public.”
Since then, gold, oil and silver ETFs have gathered a lot of assets from both institutional investors and retail clients, he said. “These assets became a staple in their portfolios.” “More people are trading commodities than ever before” thanks to exchange-traded products, said Brown.
The good and the bad
But popularity can be a curse, particularly for gold, which took the biggest hit last month.
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Among commodity ETFs, GLD and IAU saw the largest outflows in April and have seen the biggest outflows year to date, IndexUniverse data show.
With huge uncertainty around the globe and central banks printing money, gold seemed like a good place to “hide,” as well as a decent inflation hedge, said Brown.
But with the stock market going up non-stop and zero real interest rates, it made more sense “for institutional players and then retail to move out of an asset with no yield to more risky assets that might have yield, like stocks,” he said.
That doesn’t mean that all commodity ETPs have suffered.
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IndexUniverse data show that ETFS Physical Palladium SharesPALL -0.32% saw the biggest inflows among the commodity ETPs in April.
“PALL received net inflows of nearly $24 million, as expectations rose that the anticipated deficit in the palladium market in 2013 may become larger,” said Will Rhind, managing director of ETF Securities, attributing the deficit expectations to strong auto sales numbers and concern over lower supply coming from Russian government stockpiles.
Among the exchange-traded products offered by ETF Securities, inflows in April were seen in silver of $33 million and broad-basket agricultural products of $10 million. Gold and copper were “out of favor for investors,” with outflows of $794 million and $140 million, respectively, according to ETF Securities.
John Person, president of NationalFutures.com, said he’s seen a “change of sector rotation from fear-based commodities such as gold into energy, materials and technology.”
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“The current breakout in the global equity markets combined with the advance decline indicators suggest a broader and more sustainable move for stocks in the next few years,” he said. “This may explain the liquidation in gold that has been ongoing since last year.”
But while the market has seen funds move out of GLD and the iShares Silver TrustSLV +0.39% , it hasn’t seen such a move out of the United States Oil fund USO -0.09% , he said. The ETF saw net inflow of $150,000 in April, according to IndexUniverse.
“Not all ETFs have fallen out of favor,” said Person.
Myra Saefong is a MarketWatch reporter based in San Francisco. Follow her on Twitter @MktwSaefong.
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