Category ETFs: Is Gold Really Losing Its Shine?
Inflows: Money piles into emerging market and US equities
Examining last week’s most significant flows within our entire ETF universe, we see that trend-following strategies dominated market action. In terms of inflows, investors continued to pour capital into US and emerging market equities.
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Falling risk aversion and remarkable optimism among US equity bulls—which we discussed in Part 2 and Part 3 of this series—become even more significant in the context of our overall ETF universe. As you can see in the chart above, three of the major US equity index ETFs ranked among the top five ETFs with the largest capital inflows last week. SPDR’s S&P 500 ETF Trust (SPY) was last week’s investor darling, attracting ~$3.3 billion of fresh capital. The inflows pushed SPY’s cumulative net flows to a one-year high.
The fact that investors are increasing exposure to the broader US equity market at a time of record highs shows that they don’t want to miss out on much-needed basis points if US stocks continue to push higher. The same is true of iShares’ Russell 2000 ETF (IWM), which ranked third on our weekly inflow list, closely followed by PowerShares’ QQQ Trust (QQQ).
iShares’ MSCI Emerging Markets ETF (EEM) also continued to attract investor capital. As we discussed in last week’s article—“Country ETFs: Double Down on Emerging Markets?”—2016’s upside reversal in EEM has become much more than just a “dead cat bounce.” The emerging market powerhouse (EEM) saw inflows of ~$1.3 last week while closing higher for a fifth consecutive week.
Outflows: The downside reversal in gold (GLD) continues
The YTD (year-to-date) rally in gold is starting to look a little shaky—both in terms of performance and fund flows. As you can see in the chart below, SPDR’s Gold Trust (GLD) saw the largest outflows within our ETF universe last week. Investors pulled out ~$870 million of cash while the highly liquid gold-price proxy ETF closed marginally lower.
Last week’s outflows reflect a broader reversal in the YTD (year-to-date) upside trend in GLD. While the ETF is still up a respectable ~25.6% since the beginning of 2016, the rally has lost steam since its high on July 6 as the ETF gave up ~2.8%. Fund flows tell a similar story: Cumulative capital flows into GLD reached a YTD (year-to-date) high of ~$13.7 billion in July. After that, the ETF lost ~$920 million in assets. One of the reasons for GLD’s downside reversal is the diminishing demand for physical gold. Last week, the World Gold Council announced that global demand for gold reached a record in the first six months of 2016, but that consumer demand from India and China—two of the strongest buyers of gold—was lower.
Another reason is the return of stability to global equity markets after the post-Brexit shock diminished. It’s a fact that investors buy into GLD when equity markets turn lower in times of elevated uncertainty. You can see this trend in a three-month rolling return correlation between GLD and SPY that’s currently at about -62%. Similarly, GLD’s correlation to the Vanguard FTSE Developed Markets ETF (VEA) currently stands at~54%.
That being said, GLD still tops this year‘s inflow list with a massive ~$12.8 billion gain in AUM (assets under management). To understand the relative magnitude of these inflows, note that the second-highest YTD inflows currently amount to ~$8.6 billion and are in iShares’ Core U.S. Aggregate Bond ETF (AGG). And while we’re at it, looking back to 2009, we know that GLD has seen consistently positive returns in August.