IAU Will Steal GLD's (and Others') Market Share

Includes: GLD, IAU, SGOL
by: IndexUniverse

by Matt Hougan

The IAU price cut is the first major strategic maneuver by BlackRock since acquiring iShares, and it’s a very, very good one.

In case you missed it, BlackRock’s iShares unit slashed the annual expense ratio on its gold bullion ETF (NYSEArca: IAU) from 0.40 percent to 0.25 percent per year. That places IAU’s cost far below that of market leader SPDR Gold Shares (NYSEArca: GLD), as well as the third-run competitor, the ETF Securities Physical Swiss Gold Shares (NYSEArca: SGOL).

Currently, GLD has $53 billion in assets under management, while IAU has $3.4 billion and SGOL has $600 million. I think that ratio will shift at least somewhat as the-now-lower-costing IAU gains market share from long-term gold investors.

This is big news in two ways.

First, it’s unmitigated good news for investors. GLD has long been the most overpriced ETF in the world. With an expense ratio of 0.40 percent per year, GLD generates $212 million in annual revenues for SSgA. That’s absurd when you consider that all the fund does is put gold in a vault and let it gather dust.

Until now, no one has challenged GLD on price. SGOL came in at 0.39 percent, but a 0.01 percent difference isn’t enough to matter. However, 0.15 of a percentage point—37.5 percent lower than before—matters quite a bit, at least to investors with a long-term time horizon. In fairness, it probably matters less for traders, who will continue to favor the more liquid GLD.

(One flaw in iShares’ new low-price strategy is that it recently split the shares of IAU 10-for-1, driving the per-share price down from $118/share to $11.80/share. The move appears to be an effort to appeal to retail investors, but for advisers and institutions paying commissions based on the number of shares traded, it raises the expense of trading the fund.)

The second way this is big news is from a big-picture ETF industry perspective. iShares has never competed heavily on price, or almost never. Way back in the early days of the ETF industry they cut the expense ratios on their single-country ETFs, then known as the WEBS. But that’s been about it. Generally, they’ve aimed to deliver a complete product set, and to keep pricing reasonable—never ridiculously high, but never bare-bones low either. They’ve let Vanguard and Charles Schwab duke it out over low-end pricing.

With the IAU price cut, they’ve shown a newfound ability to be flexible on price. Perhaps they’ve learned a little as they’ve watched Vanguard and its ultra-low price emerging markets ETF steal market share from its iShares MSCI Emerging Markets ETF (NYSEArca: EEM). Or perhaps BlackRock is pushing the envelope in an effort to make iShares more competitive in the areas where it’s been lagging the market.

There’s no way to know for sure, but it’s true that GLD has been cleaning IAU’s clock for five and a half years, and this is the first time that iShares has responded.

GLD isn’t going away. It’s a great fund and has much better primary liquidity than IAU. It will continue to be the fund-of-choice for traders, and for many investors as well. Assuming the gold bubble doesn’t pop, I’d expect its assets to continue to grow.

But the days where all the assets flowed to GLD and away from IAU are over. SSgA now has a real competitor on its hands in the gold market.