Is Gold Losing Ground to Emerging Markets in the ETF World?

Michael Teague  |

While still the world’s biggest bullion ETF, the SPDR Gold Shares Exchange Traded Fund (GLD) took the brunt of the beating sustained by commodities last month, and has now lost its position as the second-place holder in terms of largest U.S. ETFs by assets, falling to third behind the Vanguard FTSE Emerging Markets ETF (VWO).

Down almost 6 percent over the past month, GLD lost $6.77 billion of investor cash in April, the ostensible result of a 7.6 fall in the price of the precious metal. The ETF has lost more than $13.5 billion in assets in 2013 alone.

Various reasons have been given for the travails of gold and by extension the most important gold ETF, with the Federal Reserve being among the most widely cited of these, but for reasons that are not immediately evident.

In a climate of open-ended fiscal stimulus, otherwise known as quantitative easing, the likes of which has existed in the U.S. more or less since the great recession, the price of gold has increased as investors worried about the value of the dollar look for a safe place to store money. This was exactly what was happening until 2013, with the price of gold well in to a 12 year bull-run.

However, the unprecedented and incredibly resilient market rally of 2013 has given credence to the notion that the Fed’s experimental monetary policy is finally starting to stimulate the economy the way it was designed to, leading investors to feel more comfortable with the relatively greater risk of equities.

More cynically stated, it could also mean that investors and markets have simply come to expect the Fed to keep interest rates at historic lows and inject $85 billion into the economy on a monthly basis on an indefinite basis. Either way, gold was more or less broken in the month of April, and has struggled quite a bit since it dropped below $1400 per ounce.

But gold was also hit at the same time by reports that the Central Bank of Cyprus was considering selling a not-insignificant amount of its gold reserves to help the country pay for an EU bailout. This threatened the notion of gold as a safe haven both symbolically as well as in a more tangible sense given the number of troubled banking sectors throughout the European Union who could also decide to sell their reserves of the precious metal should that time come.

And now, with both the Bank of Japan and the European Central Bank embarking on their own QE-style stimulus policies in the hopes of jumpstarting their economies out of recession, gold is still limping along, with some even pronouncing what sounds like a final victory for equities.

In the meantime, the Vanguard Emerging Markets ETF is now the second largest among those listed in the US. VWO also lost considerable assets in April, to the tune of $1.55 billion, suggesting that the problems for gold are commodity-specific issue, if not a gold-specific issue. Still, VWO has been on the rise, passing over the iShares MSCI Emerging Markets Index Fund as the largest emerging markets ETF in early 2011.

Vanguard had a decent April, up nearly 4 percent to the current trading price of $44.15, and over 5 percent for the past year. This may have something to do with the fund’s holdings, which include South Korea’s Samsung Electronics, and Russia’s energy monolith Gazprom. Most of the fund’s holdings comprise companies from China (almost 18.8 percent), South Korea (13.75 percent), Brazil (11.65 percent), Taiwain (10.23 percent), followed by South Africa, India, Mexico, Russia, Malaysia, and Indonesia, in that order.

That the fund has become the second largest ETF is likely the result of three factors: increased investor confidence in equities, the corresponding loss of faith in precious metals, and the ever-growing interest in emerging markets.

On the latter point, the iShares MSCI Emerging Markets Index (EEM) is up over 4 percent over the last year and over 3 percent this past month to its current price of $43.70. Meanwhile, the SPDR S&P Emerging Markets ETF (GMM) is up almost 3 percent over the last month, and over 4 percent over the last year, to its current trading price of $66.90.

The PowerShares FTSE RAFI Emerging Markets Fund (PXH) has gained 3.49 percent over the past month to its current price of $22.15, while the WisdomTree Emerging Markets Small-Cap Dividend Fund is up over 6 percent year-to-date, and 3.61 percent over the past month to $52.69.

It stands to reason that while emerging markets ETFs are the direct cause of GLD’s troubles of late, their overall performance over the past month, if it continues, could very well provide ETF investors with a more attractive alternative to the precious metal.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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