As the Federal Reserve steps back on interest rate hikes following the collapse of SVB Financial, gold EFTs rally, continuing the trend of outperforming the S&P 500. Between March 15 and March 22 (when the Fed announced the latest interest rate increase by just 25 points—a much more timid strategy compared to previous ones), people invested approximately $521 million in SPDR Gold Shares GLD with $709 million entering the fund on March 13 alone.
The sudden spike in gold ETF demand didn’t come from nowhere. Immediately before the March 13 spending, the Federal Reserve, Treasury Department, and Federal Deposit Insurance Corp. provided a joint statement on March 12 addressing emergency government actions to restore confidence in the banking system following regional failures that sparked from the SVB collapse on March 10.
“This is a flight to quality as a result of the uncertainty tied to the banking crisis and the lack of clarity about when the Federal Reserve will stop raising interest rates,” Todd Rosenbluth, the head of research at VettaFi, explains during a phone interview. “Gold GC00 has always been a safe haven for investors in times of uncertainty, but now it’s starting to see a pickup in flows,” he continues, highlighting how SPDR Gold Shares particularly show “strong inflows in the past week.”
So far, gold ETF shares have continued to outperform S&P 500 SPX throughout the first quarter of 2023 after leaving stocks and bonds in the dust during 2022 as well. As the Federal Reserve continues hiking interest rates to combat inflation, Gold ETF shares remain on the up.
SPDR Gold Shares spiked by 1.7% on March 22, immediately following the Fed’s latest interest rate decision. The next day, shares rose again by 1%, bringing the total yearly gains to over 9%.
SPDR Gold Shares are currently the biggest gold ETF with around $58 billion in collectively managed assets. iShares Gold Trust IAU follows at a close second with funds around $28 billion. Both funds allow you to invest directly in physical gold.
iShares Gold Trust IAU shares also increased on March 23, with the year-to-date gains breaching the 9% line. Both ETFs seem to be increasing at steady rates hand-in-hand.
Inflows for SPDR Gold Shares have totaled at approximately $436 million this year as of March 22, while the outflow for 2022 totaled at $2.5 billion. Last year, the fund dipped by 0.8% in total, though SPDR S&P 500 ETF Trust SPY plummeted by 19.5%—its worst performance year since the 2008 Great Recession. iShares Core U.S. Aggregate Bond ETF AGG lost 13% of its total return basis in 2022, though the first few months of 2023 show it making a swift comeback.
As of March 23, SPDR S&P 500 ETF Trust was up by 3% and the iShares Core U.S. Aggregate Bond ETF showed a total return of over 3%.
As we enter April, analysts and investors are still unsure of how the recent banking fears will impact the broader market and economy. Some believe we may see interest rate cuts by the end of the year while others predict further hikes. March 23’s performance for Fed fund futures shows how some traders see cuts coming.
On March 22, the Fed adjusted its target range to 4.75% to 5%, announcing potentially one additional rate hike in 2023. “Rate cuts are not in our base case,” Jerome Powell, a Fed Chairman, explained to reporters after announcing the decision.
“Historically, we’ve seen Fed rate pauses actually kick off a bullish rally for gold,” Robert Minter, abrdn’s director of investment strategy, explains during a phone interview. He noted examples of how gold spiked when the Fed paused hikes in 2000, 2006, and 2008. The abrdn Physical Gold Shares ETF SGOL with $3 billion in total assets is also up by over 9% this year.
Some investors opt for a cheaper buy-in strategy with less popular ETFs, like the SPDR Gold MiniShares Trust, offering $6 billion in assets and a 0.10% expense ratio. The SPDR Gold MiniShares Trust provides a “strategic allocation” for investors building their portfolio and “adding in gold as a slice,” according to Rosenbluth. Active investors already in the gold ETF game may prefer SPDR Gold Shares because of the higher liquidity.
“If you’re looking to trade, it may make more sense to have GLD because it trades more,” Rosenbluth explains. Short-term investors don’t need to worry about the expense ratio, though anyone considering long-term trades should think about the cost. As always, investors should consult their financial advisors before making any portfolio moves.
