In the ETF industry record book, the S&P 500 SPDR (SPY) is a frequent contributor. Launched in 1993, SPY is the first ETF to be traded on a U.S. exchange, and has been the largest ETF in the world since its inception. That first distinction is obviously safe in perpetuity, and for years SPY’s grip on the second honor seemed to be just as secure. At the end of 2009, SPY’s assets totaled just under $85 billion, or more than twice the amount of the closest contender; the SPDR Gold Trust (GLD) finished 2009 just north of $40 billion.
But a lot changed in the first five-plus months of the year. After riding a seemingly-sustainable global recovery for the first four months of 2010, global equity markets have been crushed by concerns over a sovereign debt crisis in Europe crushed, sending SPY’s year-to-date returns into the red. The wave of risk aversion sent investors flocking to safe havens, most notably the U.S. dollar and gold bullion (see Five Safe Haven ETFs). Gold recently closed at a new all-time high of $1,245 per ounce, materially boosting the total value of GLD’s assets; the fund has posted a year-to-date return of about 12%.
At the end of May, the gap between SPY and GLD had closed from nearly $45 billion to just over $20 billion. With about 1,300 tons of bullion in its vaults, GLD has become the world’s sixth largest holder of gold, ahead of several sovereign wealth funds. The diverging fortunes of GLD and SPY haven’t been attributable solely to changes in share prices. Through May, GLD had seen cash inflows of about $7.4 billion on the year, compared to outflows of $17 billion for SPY (almost all of SPY’s outflows came in January).
That gaps has closed further in the first week of June, as creations of new shares have increased the amount of gold bullion owned by GLD; through Tuesday SPY’s lead had shrunk to just over $13 billion. In surveying the landscape of the ETF industry, we thought we were going out on a limb by predicting that GLD would surpass SPY in total assets in the next few years (see Five Bold Predictions For The ETF Industry). But if the trends from the first week of June continue, GLD’s assets will exceed those of SPY by the end of the current month.
It’s still unlikely that GLD will be atop the industry totem pole when the next monthly roundup comes out. But that day clearly isn’t far off. GLD’s eventual ascension to the top spot is a virtual certainty for two major reasons. First, GLD faces far less competition for investor dollars. While there are only two S&P 500 ETFs (IVV is the other), the number of funds in the Large Cap Blend ETFdb Category, all of which are alternatives to SPY in some way, now exceeds 30.
It’s worth noting that not all the dollars in SPY belong to buy-and-holders; the fund is a popular option for day traders looking to establish short-term exposure (both long and short) to the broad market. SPY’s grip on this market is pretty secure–few securities can come close to matching the liquidity of the S&P 500 SPDR. But competition for the dollars of buy-and-holders has never been more intense.
GLD competes with a handful of physically-backed and futures-based ETFs, as well as a couple formidable gold miner ETFs. But GLD’s size relative to its counterparts makes it the default choice for investors looking to establish exposure to bullion (see this Guide To Gold ETFs).
Second, the commodity ETF space continues to expand rapidly, with more and more investors embracing the exchange-traded structure as the most efficient way to gain exposure to natural resource prices. Through the first five months of the year, domestic equity ETFs saw outflows of about $3.4 billion, while commodity products took in more than $5 billion, a continuation of the previous year’s trends. GLD is still in the sweet spot on its growth curve, while SPY is more typical of a product at maturity.
The level of assets maintained by individual ETFs obviously has little bearing on the appeal of the fund from an investment perspective; the arbitrage mechanisms build into ETFs prevent any fund from deviating too significantly from its NAV. So GLD certainly isn’t a “buy” just because it continues to accumulate assets, just as SPY isn’t necessarily a “sell” due to its recent shrinking act. But the big swings in the relative sizes of these products illustrates just how fluid the ETF industry is, and seems to indicate that the competitive landscape will continue to evolve rapidly in coming months. Stay tuned: it should be an interesting ride.
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Disclosure: Long IVV.