How Big Can The Gold ETF Get?

by on June 3, 2010 | ETFs Mentioned:

The ETF industry continued to show impressive growth last month, with aggregate cash flows into exchange-traded products topping $6 billion. But even another month of strong inflows couldn’t prevent most AUM totals from sliding during a tumultuous May; only six ETF issuers saw total assets increase last month. But not all corners of the ETF industry have suffered setbacks in recent weeks; the wave of risk aversion has caused investors to flock towards safe havens (see Five Safe Haven ETFs To Ride Out The Storm). The PIMCO Enhanced Short Maturity ETF (MINT), the closest thing to a money market ETF out there, saw assets surge by more than 300%.

The SPDR Gold Trust (GLD) posted the biggest asset growth in May, adding more than $5 billion. A continued run-up in gold prices certainly helped, but the majority of the growth was attributable to the creation of new shares; more than $4.2 billion flowed into GLD in May. To put that growth in perspective: that level of monthly inflows is approximately equal to the total assets of the 16 smallest ETF issuers. The stellar May performance brings the year-to-date total to more than $7 billion, and puts GLD within shouting distance of SPY for the top spot in a list of ETFs by total assets.

Ticker ETF May Inflows Assets
GLD Gold SPDR $4,216 $49,205
IAU COMEX Gold Trust $218 $3,282
SGOL Physical Swiss Gold Shares $95 $506

In recent years, investors have embraced exchange-traded funds as an efficient means of establishing exposure to commodity prices, a trend evidenced by the explosive growth of gold ETF assets. Total assets in the three physically-backed gold ETFs–GLD plus the iShares COMEX Gold Trust (IAU) and ETFS Physical Swiss Gold Shares (SGOL)–stood just shy of $53 billion at the end of May, an increase of 42% over the same point in 2010. Gold prices have appreciated by about 25% over that period, indicating that much of the growth has come through the addition of new bullion and creation of new shares.

Exchange-traded commodity products have become so popular in part because they allow smaller investors to establish exposure to natural resource prices without opening futures accounts or coming up with a secure way to physically store bullion. But the explosion of physically-backed gold ETFs hasn’t been driven entirely by small retail investors. The prolonged run-up in gold prices has been cheered by a number of hedge fund managers. GLD is among John Paulson’s largest holdings, and legendary manager George Soros disclosed earlier this year that his holdings included more than 6 million shares of the popular gold ETF (see ETFs To Play Along With Soros, Paulson, and Fournier).

Gold ETFs now hold almost 1,500 tons of bullion, putting them behind France as the world’s sixth largest holder of the previous metal. That level represents about 60% of annual mine production and almost 40% of total annual supply, putting the size of gold ETFs relative to global supply into perspective.

Bigger Than SPY?

So just how big can the gold ETF get? Over the last year, the number of GLD shares outstanding has increased from about 355 million to about 417 million, representing an additional 200 tons or so of additions to holdings. That translates into huge dollar amounts, but also a material chunk of the annual production that doesn’t go into jewelry or industrial applications.

Some investors have expressed concerns that physically-backed exchange-traded commodity products have become large enough to impact market pricing; as the popularity of these ETFs grow, a steady demand for bullion builds up that creates a floor for prices. But despite the impressive growth that GLD and other gold ETFs have turned in, don’t expect anyone to step in any time soon to force them to slow down; GLD is still very small compared to the total global gold market.

At the end of May 2009, GLD was the second largest U.S.-listed ETF, but the top spot seemed unattainable; the gold ETF had just over had the assets of SPY. Today, that number is closer to 70%, and it’s not too far-fetched that GLD will overtake SPY for the top spot in the next two or three years.

Disclosure: No positions at time of writing.