A Cheaper IAU Gaining Ground On GLD
September 27, 2011
(Updated with comments from SSgA official, starting in paragraph three.)
It’s been 14 months since iShares slashed the price of its physical gold bullion ETF, undercutting by more than a third its arch-rival fund from State Street Global Advisors, and the numbers are telling us it’s clearly making a difference in terms of investment flows.
Since San Francisco-based iShares cut the annual expense ratio of its iShares Gold Trust (NYSEArca: IAU) to 0.25 percent in early July 2010, it has had net inflows of about $3.7 billion, while SSgA’s SPDR Gold Shares (NYSEArca: GLD) has had outflows of more than $3.25 billion, according to data compiled by IndexUniverse. SSgA hasn’t changed GLD’s price of 0.40 percent since iShares made its move.
That’s a nearly $7 billion net difference in flows that has occurred largely during a sharp rally in gold prices, suggesting some ETF investors are clearly catching on to the idea that IAU in some ways could be the best bargain in the world of physical gold ETFs. Officials at SSgA stressed that while IAU clearly has gotten traction in the past year, other cost factors make IAU less inexpensive than it may at first seem.
Another fly in the ointment, it seems, is that if gold’s recent selloff of almost 15 percent this month continues, all flows risk turning negative, which would likely wipe out inflow gains IAU has made.
While iShares hasn’t really shown a willingness to compete aggressively on price, the story of IAU is a notable exception that begs the question: Would iShares try it on different funds? Officials at iShares weren’t immediately available, though in past conversations with IndexUniverse, comments from officials at the San Francisco-based company suggested the answer is probably no.
It is a question worth asking. For example, it’s clear that Vanguard, Schwab and now FocusShares, the Scottrade unit, are slugging it out on price. And with good reason: According to a recent Schwab study, investors do care about price, starting with expense ratios, and including commissions and bid/ask spreads.
Offering low-cost funds has worked for Schwab, which has amassed more than $4 billion in its own ETFs since rolling out its first ETFs in November 2009. Vanguard, for its part, appears to be on an inexorable march to the top of the U.S. ETF industry. It’s now the No. 3 ETF firm, behind iShares and SSgA, and it’s steadily closing the gap, as we pointed out in a recent podcast: “Can Anyone Stop Vanguard?”
Jim Ross, a senior managing director and global head of ETFs at Boston-based SSgA, said that price isn’t just about expense ratios. Investors should look at commissions, trading costs as well as the overall underlying liquidity of a given ETF, Ross said.
He said that because IAU’s share price of $16.11 is roughly a tenth of GLD’s price of $160.63, equal bid/ask spreads and per-share commission costs would add up to a bigger sum for IAU than for GLD on say, a $1 million trade. It might even be enough to offset IAU’s cheaper expense ratio, Ross said.
Add to that differences in daily dollar-value turnover – number of shares turned over multiplied by share price – and GLD’s liquidity is more than $4 billion compared to about $270 million for IAU, meaning an investor may well get smoother execution in all kinds of market conditions trading GLD rather than IAU.
“Those are factors that any investor should consider besides expense ratios,” Ross said in a telephone interview.
Closing The Gap
While IAU remains a much smaller fund than GLD, it’s plainly obvious it has closed the gap with GLD.
At the end of June 2010, just before iShares made its price-cutting move, IAU had $3.36 billion, compared to GLD’s $53 billion. In the past 14 months, GLD’s assets have grown 20 percent to more than $64 billion while IAU’s have grows two-and-half times to $8.42 billion.
Considered another way, GLD’s asset growth in the past 14 months has solely been a function of gold’s dramatic rally, as investors gravitated toward the safe-haven yellow metal amid uneven growth in the developed world and heightened market volatility since the depth of the financial meltdown of 2008-2009.
IAU’s asset growth, on the other hand, has included both the gold rally – 25 percent in the past year, and a nearly four-fold increase in the past 10 years – plus the $3.7 billion it has hauled in since it cut the price. Again, those inflows amount to more than twice IAU’s assets of $3.36 billion at the time iShares shaved the ETF’s price by more than a third.
Limits To The Trend
As noted, IAU’s lower price would quickly become irrelevant should gold continue to drop. ETF traders are closely watching to see if gold can close above $1,550 a troy ounce – a price just above a three-year trendline dating back to when investors were dumping funds like GLD in the depths of the crisis.
Other factors are also likely to keep a cap on the assets IAU is able to steal from GLD, starting with taxes.
Indeed, investors in taxable accounts who, say, bought GLD around the time it was launched in November 2004 don’t have much incentive to sell now, given the tax bill they’d be hit with.
But for investors in non-taxable retirement accounts, there’s no good reason not to buy-and-hold gold in the cheapest ETF out there, namely IAU.
Also, for those who don’t yet own any gold in their portfolios, IAU is clearly a more sensible choice than GLD if what they want is to hold a gold position in their portfolios as an insurance policy.
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