ETFs not the go-to method for gold exposure

Professional investors may not be so excited about bullion-back ETFs

ETFs not the go-to method for gold exposure

It’s hard to deny the appeal of ETFs in obtaining exposure to different types of assets, including fixed income, infrastructure, and real estate. ETFs have also proven to be fairly popular among investors who want to hold gold — though it seems they’re not the top choice for all.

Citing a report from commodities consulting firm CPM Group, The Wall Street Journal said that most institutional investment managers are more inclined to trade listed futures and listed options than over-the-counter (OTC) or ETF products.

“Of the investment professionals CPM surveyed, 73.4% traded gold futures and futures options, whereas 51.4% traded ETFs and ETF options,” the Journal said. Because many investors use ETFs alongside futures and options, the percentages add up to more than 100%.

Not everyone is receptive of the findings. State Street, which manages the SPDR Gold Shares ETF launched in 2004, reportedly disputes the results. “Institutional buyers … tend to be buy-and-hold investors,” George Milling Stanley, head of gold strategy at State Street Global Advisors and a former official at the World Gold Council, said to the Journal. “They aren’t interested in the speed at which they can trade; they want simple and transparent.”

In its study, CM said that investment professionals surveyed tended to perceive ore liquidity in the futures market, particularly in near-dated futures where most trading action is observed. But State Street also takes issue with that assertion.

“The ETF market in my experience is still trading larger volumes than all of the futures markets combined,” Milling-Stanley contended.

While costs remain an issue in many corners of the investing world — and are often a significant factor in the decision to purchase ETFs — the CPM survey found that the cost of trading various gold investments wasn’t a significant issue among professional investors. “Many professed not even knowing the transaction costs and cost differentials,” the report said.

It added that professional investors’ shift toward gold futures ad away from the more traditional and London-centric OTC gold market started in 2001, and there are no signs of it stopping. 

“Liquidity benefits seem likely to continue to be one of the major, if not the single most important, factor driving this ongoing shift,” it said.


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