The Golden and Silver ETF Year
In the ETF world, there's been nothing better than gold this year, with gold ETFs seeing the largest inflows so far in 2016, as well as being the best performers.
The reversal of fortunes for the yellow metal has been surprising, and in turn has pulled with it the entire precious metal ETF complex.
At the beginning of the year, gold was wallowing at six-year lows. Prices had fallen for three-straight years, from an all-time high of $1,921 /oz. to around $1,050 in December. Many analysts and prognosticators were calling for prices to fall even further―to under $1,000, to $800 or even lower.
Fed Rate Hike Bad For Gold, Right?
There was no reason for gold to rally this year when the Fed had just hiked interest rates for the first time in a decade on Dec.16, with more rate increases seemingly on the horizon, the bears argued.
But they couldn't have been more wrong.
The worst start to a year ever for the U.S. stock market in January quickly dashed expectations for Fed rate hikes. Then another shocker came on Jan. 28, when the Bank of Japan cut interest rates into negative territory, jarring bond markets around the world.
The one-two punch of stock market volatility and sliding global interest rates pushed gold sharply higher, with the yellow metal touching $1,250 by February.
Largely fueled by the easy-money policies of the Bank of Japan and the European Central Bank, global interest rates continued their stunning collapse in the following months. Rates on sovereign bond after sovereign bond fell into negative territory, a puzzling and unprecedented phenomenon.
Negative Rates Rallied Gold
By the end of June, nearly $12 trillion worth of global bonds were trading with negative yields, according to Fitch.
U.S. yields―which were never at risk of falling into negative territory―were also pulled down by the vortex, hitting a record-low of 1.32% on the 10-year bond in early July. That's when gold hit its high for 2016 around $1,375―almost 30% higher than where it began the year.
YTD Gold Price Chart
Largest Inflows Of Any ETF
Stunned by the action in interest rates, many ETF investors turned to gold as an alternative safe haven. With so many government bond yields trading in negative territory, suddenly zero-yielding gold looked attractive.
This belief became so widespread this year that the SPDR Gold Trust (GLD) has seen more inflows than any other ETF this year and its largest inflows of any year since its inception in 2004. A whopping $13.2 billion of fresh money has come into the fund as of Aug. 9, while the iShares Gold Trust (IAU) has seen inflows of $2.7 billion in that period.
Ticker | Fund | Expense Ratio | YTD Gain | YTD Inflows |
0.40% | 26.1% | $13.2B | ||
0.25% | 26.4% | $2.7B |
In fact, the money coming into physically backed gold ETFs has been so large this year that they're likely playing a part in pushing gold prices higher. Such funds have bought up almost 18.5 million troy ounces of the metal year-to-date, equal to about 14% of annual global demand in 2015.
Gains Of More than 100%
The investor frenzy for gold hasn't just been limited to physical gold ETFs. A few gold miner ETFs have seen substantial inflows of their own this year.
For example, the VanEck Vectors Junior Gold Miners ETF (GDXJ) had more than $1 billion of inflows as of Aug. 9. That's small potatoes compared with GLD, but where GDXJ and the other miner funds make up for it is in performance.
Gold and silver miner ETFs are the best-performing exchange-traded products of all so far in 2016, with eye-popping triple-digit gains in many cases. As leveraged plays on the price of the metals, miner ETFs tend to rise more in bull markets and fall more in bear markets.
With gold up as much as 30% this year, miners got the bullish jolt they needed to make a stunning comeback from their recent depths.
The PureFunds ISE Junior Silver Miners ETF (SILJ) leads the pack of nonleveraged/noninverse ETFs, with a year-to-date gain of 275%. Focusing on small- and micro-cap silver miner stocks makes it one of the riskiest bets in an already-volatile sector. But that's a bet that's paid off, with silver up 46% this year to more than $20/oz., outshining even gold.
The iShares MSCI Global Silver Miners ETF (SLVP) and the Global X Silver Miners ETF (SIL) are another pair of silver ETFs to surge higher on the year, with gains of 190.6% and 182.6%, respectively.
Both funds target market-cap-weighted indexes that track silver miners. SIL is the largest ETF in the segment by far, with more than $500 million in assets.
More Triple-Digit Returns
Not far behind the silver miner ETFs are the gold miner ETFs. The aforementioned GDXJ, for example, is up 165% this year, while the Global X Gold Explorers ETF (GLDX) is up 162.3% and the Sprott Junior Gold Miners ETF (SGDJ) is up 148.4%
All three funds focus on smaller-cap gold miners, which are the outperformers this year.
That said, broader gold miner ETFs with heavy tilts toward large-caps haven't been too far behind either. The iShares MSCI Global Gold Miners ETF (RING), which is the cheapest fund in the segment, is up 135%. At the same time, the VanEck Vectors Gold Miners ETF (GDX), the largest fund in the segment—with more than $10.6 billion in assets—is up 124.5%.
Top-Performing ETFs Of 2016 (Nonleveraged/Noninverse)
Ticker | Fund | Expense Ratio | YTD Gain |
0.69% | 272.2% | ||
0.39% | 190.6% | ||
0.65% | 182.6% | ||
0.56% | 165.1% | ||
0.65% | 162.3% | ||
0.57% | 148.4% | ||
0.39% | 136.7% | ||
0.57% | 126.8% | ||
0.75% | 124.5% | ||
0.52% | 124.5% |
Going Forward
Whether gold and silver miner ETFs have more room to run depends largely on where gold goes from here.
As of this writing, the yellow metal has pulled back a few percentage points from the year's peak. Nevertheless, it's still holding up well, even as stock markets in the U.S. have bounced back from their January swoon to hit record highs.
Far from turning away from gold, inflows into GLD and IAU continue at a steady pace, suggesting that investors see the metal as much more than a hedge against stock market volatility or inflation as it was widely considered for so long.
It's now a hedge against negative rates, against currency depreciation and the unknown, more generally.
Indeed, as many gold bugs argue, the opportunity cost of holding gold has never been lower, so it doesn't hurt to keep an allocation to the yellow metal. ETF investors wholeheartedly agree.
Contact Sumit Roy at sroy@etf.com.
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