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ETF Specialist

SPDR Gold Shares Becomes World's Largest ETF

Assets continue to pile into the gold bullion ETF, while they flow out of the S&P 500 ETF.

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With continued weakness in U.S. equity markets and investors continuing to flock to safe havens such as precious-metals commodities, the crown of the largest exchange-traded fund has passed for the first time to  SPDR Gold Shares (GLD) from  SPDR S&P 500 (SPY). While the changing of the guard may be temporary, it highlights investor interest in nontraditional asset classes.

Morningstar data show that prior to Monday's market open, GLD had $76.67 billion in assets to SPY's $74.38 billion. The fund, which issues shares backed by physical bullion, has benefited both from rising gold prices and increased inflows, while the opposite dynamics--falling equity prices and investors heading for the exits--have befallen SPY. Concerns over sovereign debt--both in the United States and in Europe--haven't helped matters.

Ultimately, what is going on is two sides of the same coin--and one that can be captured perfectly by one word: fear. Even with relatively attractive valuations of U.S. stocks, investors right now are afraid to invest in large-cap U.S. equities. Particularly given low inflation and a 0% return on money market funds (and, hence, a negative real return), investors clearly are drawn to a safe haven like gold; it's easy to envision investors shunning a negative real return in money market funds when they can potentially see better returns from holding gold.

Over the longer term, the two ETFs' assets clearly will continue to depend on two things: gold prices and investor confidence in large-cap U.S. equities. In the meantime, for a look at what my colleague Abe Bailin sees in GLD, read this report  here.

One thing worth noting is that some of what has kept SPY the largest ETF of any kind up to now has been its first-mover advantage; launched in January 1993, the fund literally was the first ETF ever created. Nowhere was it written that SPY would remain the king of the ETF world--or even of the S&P 500 space.  IShares S&P 500 Index (IVV) already has $24 billion in assets, making it one of the largest funds on the market. Furthermore, with the launch almost a year ago of  Vanguard S&P 500 ETF (VOO), investors now have nearly identical alternatives that are as cheap, if not even cheaper (VOO has a 0.06% expense ratio to SPY's 0.09%) and with lower tracking error. With a better competitive set going forward, one could envision the playing field leveled further.



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Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.