Exchange-traded funds (ETFs) backed by physical gold have outperformed others tracking equities or fixed-income indices, bolstered by a surge in inflow from investors looking to profit from a recent rally in the safe-haven asset to a six-year high through such passive funds.
Mirroring the gains in gold, which have returned 17.5 per cent year to date, prices of some of the seven gold-backed ETFs listed in Hong Kong and China have hit new highs.
In Shanghai, HuaAn Yifu Gold ETF, the largest in mainland China with total assets at 5.6 billion yuan (US$793.2 million), hit 3.4 yuan, a historical high, on Friday. Guotai Gold ETF, managed by Guotai Asset Management, closed at 3.38 yuan, also a record high.
In Hong Kong, all four gold-backed ETFs took the top four spots as funds with the highest returns. SPDR Gold Trust, managed by State Street Global Advisors, returning 8.1 per cent over one month. The Tracker Fund, which tracks the Hang Seng Index, reported a 9.3 per cent loss over the same period.
Robin Tsui, Asia-Pacific gold strategist for SPDR, said the trading volume of the ETF had doubled since June to US$2 million on average per month, up from just US$1 million for each of the first five months this year.
“ETFs are a simple and cost-effective way for investors to invest in gold, as you can buy and sell on a daily basis, and the ETF’s performance correlates closely to that of spot physical gold,” Tsui said.
Tsui said since June, SPDR, with US$40.4 billion in net assets, had attracted strong inflows of US$4.6 billion, reversing a net outflow of US$1.8 billion from redemptions over the first five months this year.
“Year to date, the 16 per cent return of gold ETFs overall still lags US equities, [which are] at around 19 per cent. But we see a lot of repositioning away from US equities into gold ETFs, as some investors are now anticipating a correction is looming in equities,” Tsui said.
The strong gains by ETFs mirrored rallies in spot and gold futures, both of which broke above US$1,500 last week. Gold’s ascent since late June has come amid the escalating US-China trade war and concerns about a recession, more dovish stances by central banks and an increase in negative-yielding assets globally.
Citibank, for example, has revised up its 6-12 month target for Comex gold futures, at US$1,600 per ounce.
According to the World Gold Council, total gold holdings backing ETFs globally rose to 2,548 tonnes, bringing assets under management up to a six-year high, at US$115.4 billion, the highest level since April 2013.
For investors keen on redeeming ETFs into physical gold, David Quah, managing director at Value Partners, said there has only been one instance since the launch of its Value Gold ETF in 2010 where an investor has requested for physical delivery, stored at a vault at the Hong Kong International Airport.
“While knowing that there is an option to take physical delivery of gold, most investors do not use that option as it would incur extra cost from transport and insurance. They have to go through tight security procedures at the airport vault,” Quah said.
Quah said year to date, inflow into the Value Gold ETF had risen 10 per cent, mainly from retail and high-net-worth investors. As of the end of July, its ETF return was 11.3 per cent, with a total expense ratio of 0.42 per cent.
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