SPDR ETFs: How global market chaos spurred the use of gold ETFs

Oct 26th, 2018 | By | Category: Commodities

By Matthew J. Bartolini, Head of SPDR Americas Research.

Matthew J Bartolini, Head of SPDR Americas Research

Matthew J Bartolini, Head of SPDR Americas Research.

Before the launch of gold-backed ETFs in the early 2000s, the primary way for most investors to gain exposure to the precious metal was to buy physical gold bars or coins. This was neither liquid nor transparent, and the cost of storage and acquisition was often prohibitive.

But when gold-backed ETFs debuted in the US with the launch of the SPDR Gold Shares (GLD US) in 2004, these obstacles were lifted, and investors were suddenly able to buy gold the same way they could buy a stock.

When the financial crisis hit in 2008, the potential benefits of being able to access gold in the ETF structure quickly became apparent, and investors responded by flocking to GLD.

Gold’s “safe haven” status on display

Gold has earned its description as a “safe haven” asset because it has historically maintained or even improved its value during times of intense market stress, helping investors preserve their wealth. Wealth preservation became a key concern during the financial crisis when investors were unpleasantly surprised to find their portfolios weren’t nearly as diversified as they thought. As the chart below shows, multiple asset classes—from stocks to bonds to commodities—simultaneously plunged in value. But gold delivered competitive returns and outperformed other asset classes.

Source: SPDR ETFs.

With investors searching for potential safe-haven assets amid the financial storm, many turned to GLD. GLD’s average daily volume jumped significantly, and this heightened level of activity, shown below, continued even after the financial crisis.

Source: SPDR ETFs.

As GLD’s dollar volume surged, the chart below shows GLD’s bid-ask spread dropped. The sudden surge in trading volume bolstered GLD’s liquidity and helped to drive down the ETF’s spreads.

Source: SPDR ETFs.

While GLD’s spreads dropped, its flows—illustrated in the chart below—quadrupled. Gold became an alternative to currencies and stocks as Lehman Brother’s failure called the stability of banks into question and heightened worries over potential bank runs. In what might look like an unusual flow pattern, the chart also shows that GLD flows dropped the year following the height of the crisis, indicating investors’ intense worry and frantic search for safety during the crisis pulled gold demand forward.

Source: SPDR ETFs.

The financial crisis ushered in lasting changes in the way investors approach portfolio construction and the tools they use to execute investment strategies. I believe the crisis acted as the initial public offering—or IPO—of ETFs, and certain asset classes have helped drive the massive adoption of these funds in the years since the crisis.

Gold is one of those asset classes. As these charts demonstrate, when market participants sought shelter from the financial storm they turned to gold. I believe GLD’s ability to provide relatively quick and efficient exposure to gold proved to a broader swath of investors that the ETF structure could withstand unprecedented turmoil and allow them to express their views despite the intense market stress.

I believe investors learned they could use ETFs for liquidity management, real-time risk transfer and price discovery objectives during times of severe distress. I think the crisis also helped investors gain comfort with ETFs, seeing them as a trusted investment tool that could be used to allocate, construct and manage portfolios.

Just as the ETF industry has flourished over the last decade, we expect it to continue to grow and expand in the coming decade. ETFs should continue to be a disruptive and ground-breaking force in the industry that will continually innovate to meet the needs of tomorrow’s investors.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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