All That Glitters Is Not Gold

In times of economic crisis, investors and regular citizens scared-out-of-their-minds turn to gold. As a gift, I like to say it’s always the right size and the right color. But as an investment, it’s an asset that is supposed to hold a steady value. While demand for gold can push the precious metal’s price higher, it’s value can also rise on a relative basis. Specifically, as the dollar continues to fall in value, it takes more of them to buy the same ounce of gold. So, if you think the stimulus plan might devalue the U.S. dollar and you don’t know where to invest, it may be a good time for gold.

With gold up year-to-date 4.97% as of Feb. 6, compared with 4.32% for all of 2008, ETFGuide compares the 2008 returns of four exchange-traded vehicles (ETVs).

SPDR Gold Trust (GLD) up 2.99%
Market Vectors Gold Miners ETF (GDX) down 26.65%
PowerShares DB Commodity Index Tracking Fund (DBC) down 30.77%
ProShares Ultra Gold (UGL) n/a, launched in Dec. 2008

I look at three more.

iShares Comex Gold Trust (IAU)
PowerShare DB Gold Fund
PowerShares DB Precious Metals Fund

The Gold Trust, up 4.92% this year through Feb 6., did the best because it holds real, solid gold bricks in a vault in London. If you want to own gold and not have to store it, this is the way to go. This or iShares Comex Gold Trust (IAU), which is up 5.11% as of Friday. These are not true funds, but grantor trusts. Shareholders are taxed as if they own the underlying gold, with a long-term gain tax rate of 28%.

The Market Vectors Gold Miners is an ETF that holds stocks. So, even though the commodity gold went up, the stocks fell because they were caught up in the macro downtrend of the broader stock market. The S&P 500 lost about 38% last year, so the rising price of gold helped the ETF’s returns, still beating the S&P 500 by 11 percentage points doesn’t feel so good when you lost 27% of your investment. Gold stocks will give leverage over the commodity, up to three times the percentage gain in the price of gold, but that leverage also works on the way down. Year-to-date Gold Miners is down 26% according to Yahoo Finance. Because Market Vectors holds stocks the current long-term capital gain tax rate of 15% applies.

PowerShares DBC holds futures contracts, but only about 10% is comprised of gold contracts, so it’s not a pure play. But it is a good way to play the broader commodity sector by tracking an index. Obviously, 2008 wasn’t a great year for commodities either. DBC is taxed like futures contracts. Capital gains are taxed 60% at the long-term rate and 40% at the short term rate.

ETFGuide doesn’t look at PowerShare DB Gold Fund (DGL), which holds only gold futures contracts. The DGL rose 3.2% last year and is up 2.61% year-to-date. There’s also the PowerShares DB Precious Metals Fund (DBP), which is comprised of 80% gold and 20% silver. It slid 1.12% last year and is down 3% year-to-date.

The price of one ounce of gold closed at $895 on the London Bullion Market, down from $920 last Thursday.

For a detailed explanation of the gold and all the other ETV tracking commodities check out ETFs for the Long Run: Chapter 8: The ETFs That Aren’t ETFs.

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ETFs See Cash Inflows Even as Asset Values Fall

ETFs and ETNs continue to see net cash inflows even as total assets under management fall. The conclusion is this is a function of just falling asset values.

According to the National Stock Exchange (NSX), at the end of November, total U.S. listed ETF and ETN assets fell 16.8% to $487.6 billion from $585.8 billion in November 2007. However, net cash inflows for the month were $26.4 billion, bringing the total net cash flow for the 11 months through Nov. 30 to $136.8 billion. In November, 315 ETFs saw net cash inflows, while 179 saw outflows. ETNs split at 16 each.

Notional trading volume in both ETFs and ETNs fell 33% in November from October to $2.2 trillion. Surprisingly, this represents a record 43% of all U.S. equity trading volume, up from 38% in October. That just shows how much total equity volume must have fallen off. At the end of November 2008, the number of listed products totaled 843, compared with 650 listed products one year ago and 806 in October.
According to the NSX, the only ETF firms that saw assets grow are State Street Global Advisers, ProShares, Van Eck and

Ameristock/Victoria Bay. All those firms saw net cash inflows for the year through Nov. 30 increase compared with the first 11 months of 2007. Vanguard did as well. ProShares’s assets under management rocketed 112% to $20.9 billion. SSGA’s assets grew 8.3% to $142.9 billion. This really shouldn’t be a surprise. ProShares sponsors the inverse and leveraged ETFs that have proved hugely popular in the market turmoil. SSGA sells the largest, most liquid ETF, the SPDR (SPY), which tracks the S&P 500. Many investors making a flight to safety or seeking a place to hold cash on a temporary basis will move to the S&P 500. Even as the S&P 500 sinks, the SPDR’s 2008 net cash inflows have surged 86% year-over-year through Nov. 30 to $18.23 billion.

Meanwhile, BGI’s iShares saw assets tumbled 29% to $229.3 billion.

Firms with net cash outflows in November included PowerShares, $309 million, and Merrill Lynch’s HOLDRs, which saw redemptions of $889 million. Surprisingly, the HOLDRs saw net cash outflows of $3.6 billion in 2007, but are up $1.2 billion so far this year. Other firms that experienced outflows in November were WisdomTree, FirstTrust, and SPA-ETF. Firms with net outflows year-to-date include Bank of New York, Rydex, X-Shares, Ziegler, FocusShares and BearStearns. The last two have gone out of business this year. Rydex is suffering as the strengthening dollar hurts its CurrencyShares.

As for ETNs, Barclay’s iPath family saw assets plunge 36% to $2.6 billion. In November, iPath saw outflows of $39 million. Morgan Stanley/Van Eck ETNs recorded outflows of $16 million in November. Meanwhile, Goldman Sach’s ETNs net cash outflows grew to $97 million year-to-date. Comparisons are not relevant for many of the other ETN firms as they had few funds, if any, last year.

Among the top ten ETFs and ETNs, the SPDR (SPY), iShares MSCI EAFE Index Fund (EFA), SPDR Equity Gold (GLD), iShares S&P 500 Index Fund (IVV), iShares Russell 1000 Growth Index Fund (IWF) and iShares Russell 2000 Index Fund (IWM) all saw net cash inflows in November, according the NSX. Of the 10 largest funds, these saw outflows last month: iShares MSCI Emerging Markets Index Fund (EEM), PowerShares QQQ (QQQQ), iShares Barclays Aggregate Bond Fund (AGG) and the Dow Diamonds (DIA).

The NYSE Group also releases volume data for its exchanges. Average daily matched volume for ETFs, or the total number of shares of ETFs executed on the entire NYSE Group’s exchanges surged 93.5% to 672 million shares from 347 million shares in November 2007. Total matched volume for the month totaled 12,765 million shares, a 75.1% increase. Total volume year-to-date through Nov. 30 jumped 74.7% from the same period last year to 102,583 million shares.

Handled volume, which represents the total number of shares of equity securities and ETFs internally matched on the NYSE Group’s exchanges or routed to and executed at an external market center, totaled 14,813 million shares last month, a 77.6% surge over the year-ago month. Average daily handled volume rocketed 96.3% to 780 million shares from 397 million shares a year ago. Year-to-date total volume climbed 78.1% to 117,629 million shares.

The NYSE also reported total ETF consolidated volume for the month leapt 92.1% to 45,151 million shares, while total average daily volume soared 112.3% to 2,376 million shares. Year-to-date, total consolidated ETF volume surged 119.4% over the first 11 months of 2007 to 355,133 million shares. I think those refer just to the NYSE Group.