State Street Global Advisors literally struck gold last year with the introduction of the streetTracks Gold Shares ( GLD) exchange-traded fund. Now, as the gold ETF approaches its first birthday, the question is whether State Street can keep the hits coming. Since it started trading on the New York Stock Exchange on Nov. 18, 2004, the GLD, whose shares represent one-tenth the price of an ounce of gold bullion, has exploded to more than $3.15 billion in assets. It trades, on average, close to 2 million shares a day. In terms of price, the GLD is up 5% since its debut, rising to $46.66 from $44.43, along with the price of gold. Making the GLD's success all the more lustrous is that it comes at the expense of rival Barclay's offering, the iShares Comex Gold ( IAU) ETF, which first started trading a few months after the GLD in January. At last count, the IAU had assets of $186 million and trades in the neighborhood of 84,000 shares a day. Expenses for both funds are similar, at 40 basis points, a sum Morningstar analyst Karen Wallace calls "pretty reasonable" considering that a typical precious metal fund in the category costs 1.67%. Analysts agree that first-mover advantage and the superior ticker symbol -- how many traders truly remember that AU is the symbol for gold on the periodic table? -- were the prime reasons for State Street's first head-to-head victory over its powerful rival in years. Says Lipper's Don Cassidy, "First mover advantage is huge in ETFs. If it works, then traders stick with it." Nevertheless, the GLD also was the culmination of years of effort and coordination by State Street, along with the fund's sponsor, the World Gold Council. And some analysts say it's the big win that may just rejuvenate the company in the escalating ETF wars.
"The GLD was the right product at the right time," says Stuart Thomas, managing director at the World Gold Council. "And a big part of the reason why we signed up with State Street because of their renewed commitment to the ETF business."
Eureka!The GLD may have been an overnight success in terms of market acceptance, but according to Gary MacDonald, director of marketing at SSgA, it was more like a four-year struggle. "It took a lot to get this through the Securities and Exchange Commission, because this was the first product of its kind," says MacDonald. Despite the SEC slowing down the approval process to a snail's pace, MacDonald says there was never any doubt about the product because of the huge pent-up demand from investors looking to own gold without the headaches of buying bullion and storing it. "Investing in gold ETF shares is in many ways more convenient than investing directly in gold," says Morningstar's Wallace. "For instance, if one were to hold an actual chunk of gold bullion one might run into liquidity issues, while ETF shares are more easily traded." Another potential positive of investing directly in gold is that the price of bullion itself tends to be less volatile than the price of gold-mining stocks, says Wallace. "Mining gold comes with very high capital expenditures, thus a lot of the profit a gold producer makes is already gone by the time the gold is extracted from the mine." And while the advent of gold ETFs saves investors a trip to the local rare-coin dealer to buy some bullion, players in the physical gold market say the competition has not reduced their business, yet enhanced it by pumping up demand. "Our business has significantly improved since the first ETF was introduced last year," says Mark Albarian, president and chief executive of Goldline.com, an Los Angeles-based precious metals dealer. "The GLD and IAU have brought in people to the market that have never been comfortable holding gold." Albarian attributes part of the rise in the price of gold over the past year to the demand created by the ETFs.
There are a few downsides to these investments, however. For tax purposes, investors of this ETF are treated as though they own "collectibles," which means that any long-term gains will be taxed at a maximum 28% tax rate rather than the current 15% tax rate that applies to long-term capital gains on the sale of stocks and mutual funds. Another negative about gold as an asset class, says Ron DeLegge, editor of ETFguide.com, is that it doesn't pay a dividend, which makes it a bad idea for income-oriented investors. "While gold has historically been used as a hedge against inflation, it's not an income-producing asset, like real estate." "The biggest downside is probably the volatility of the asset class," says Wallace. "Gold is currently trading at around $470 per ounce -- a 17-year high -- so potential investors in either of these funds need to make sure that adding gold to their portfolios is part of a long-term investment plan, not just a bet on the flavor of the month." Gold and the ETFs that track it may be hitting new highs, but gold devotees have a shinier perspective when it comes to the metal's price. The gold bugs point out that gold still trades well below its 1980 all-time high of $850 an ounce, and considering the nation's inflation prospects, still could rally close to it. "The threat of inflation and higher interest rates have made investors revisit the idea of holding financial products linked to tangible assets, like the GLD," says DeLegge. "With the click of a button, ETFs have made it easy to have gold exposure, when in the past it wasn't so easy."
Gold and OldiesState Street Global Advisors may savor this one-year "golden anniversary," but it will be their first celebration in a long time.
Prior to releasing the GLD a year ago, Boston-based State Street more resembled an aging rock star than a chart-topping sensation. The company, which invented the ETF back in 1993 with the S&P 500-based Spyders ( SPY), was leaning heavily on its greatest hits like the Select Sector SPDRs and the Dow Diamonds ( DIA) instead of developing new products and grabbing share in what was at the time a wide-open market. As a result, State Street ceded its dominance over the industry to rival Barclay's Global Investors, which not only took the ball, but ran with it -- far and fast. BGI currently dominates the $260 billion ETF market via its 101 funds, with a total take of $158 billion in assets. When it comes to their head-to-head loss over the gold ETF, a BGI spokeswoman preferred to look ahead to the next set of commodity-based ETFs. "The iShares COMEX Gold Trust (IAU) is the first of, we hope, a broad lineup of commodities iShares products," says a spokeswoman for BGI, which currently has two more commodities iShares filed with the Securities and Exchange Commission, silver and GSCI's broad commodities index. "No two commodities are alike because the nuts and bolts of owning, taking delivery and accounting for each commodity is different." Overall, SSgA remains a distant second to BGI, with 32 funds worth close to $80 billion. Nine of those funds were released Tuesday in a big splash at the American Stock Exchange>, which, by the way, is fighting to preserve its own lead in the escalating ETF wars. Last July, BGI announced it was shifting the primary listings of 81 iShares ETFs to the New York Stock Exchange and its new partner Archipelago ( AX). Among State Street's new additions is the SPDR Dividend ( SDY) ETF, which tracks the Standard & Poor's High Yield Dividend Aristocrats Index and will compete against the iShares Dow Jones Select Dividend Index ( DVY). State Street launched the other eight ETFs under the streetTRACKS brand, including three ETFs based on bank, capital markets and insurance indexes from financial services specialist Keefe Bruyette and Woods. The remaining five funds are style-specific, tracking an array of Dow Jones Wilshire indices, in an effort to broaden SSgA's product offerings.
The multipronged launch comes after a turbulent summer in which SSgA saw a shuffle at the top of its ETF management ranks. In August, 18-year SSgA veteran Gus Fleites left to join ProFund Advisors to assist them with their ETF plans. A month later, SSgA snatched David Sandrew from Barclay's to be its director of ETF sales. "Personnel was a big problem for them, but now they have the right people in place," says Gary Gastineau, managing director of ETF Consultants. "They are finally doing a lot of the right things, and they've learned a lot from their battle with BGI." Striking gold again wouldn't hurt too much either.