Equity-focused gold ETFs may miss out on market tailwinds

BULLION-BACKED exchange-traded funds (ETFs) have been gaining traction, as they ride on the strong price momentum of the yellow precious metal.

However, market watchers noted that prices of gold ETFs – while tied to commodity prices – also depend on whether they are commodity-focused or equity-focused.

Gold-backed ETFs reverted to net inflows in the third quarter of 2024, after nine consecutive quarters of net outflows.

This came on the back of global ETFs notching record highs in terms of both flows and assets in the quarter.

But it appears that not all gold ETFs are created equal.

Morningstar director of passive investment ratings Jackie Choy noted that there is typically a correlation between prices of ETFs that focus on physical gold and spot gold prices.

Given that gold prices have been heading to record highs, investors might have changed their mindset to favour bullion-backed ETFs, said Choy.

Thomas Taw, head of the Asia-Pacific (Apac) investment strategy team at BlackRock, shared a similar notion. “For the physically backed gold ETFs, they are appreciating in lockstep with the price of gold, which is also driving inflows and interest,” he said.

While bullion-backed ETFs have been gaining momentum amid the gold rally, ETFs backed by gold-related equities have seen less interest.

According to Morningstar Direct data, inflows into gold ETFs that are equity-focused are significantly smaller than that into commodity-focused gold ETFs.

Flows into equity-focused gold ETFs amounted to some US$11.9 million in Q3, based on non-exhaustive data. This was a drop in the ocean compared with US$7.7 billion in inflows into commodity-focused gold ETFs during the quarter.

“We also have gold miner ETFs, where the question is whether gold mining companies have the pricing power to benefit from the appreciation in gold price,” added BlackRock’s Taw.

Ho Han Ming, partner at Reed Smith, noted that the fundamentals that drive gold prices, such as macroeconomic uncertainties and central banks’ fiscal easing policies, are “converging”, supporting bullion-backed ETFs’ outlook in 2025.

“Demand for gold as a safe-haven asset is expected to persist, providing support for the ongoing gold ETF uptrend, in particular for ETFs with physical gold as the underlying asset,” noted Ho.

Other drivers for gold, he said, included “growing wait-and-see positions adopted with respect to the upcoming US elections, as well as general global economic slowdown concerns projected by the International Monetary Fund”.

Robin Tsui, Apac gold strategist at State Street Global Advisors, noted that global gold ETF flows have turned positive since May this year, driven by a declining interest rate environment, the spike in market volatility in July, escalating Middle East tensions and the upcoming US presidential election.

BlackRock’s Taw pointed out that about 91 per cent of the outflows, or US$10 billion out of US$11 billion, from gold-backed ETFs since the last quarter of 2023 has returned, amid a macro backdrop that favours bullion prices.

“Much of this is being driven by investors’ need to hedge against geopolitical tensions, but also by the recent weakening of the US dollar in light of anticipated Federal Reserve rate cuts,” Taw explained.

“The Fed is only just embarking on its rate-cutting cycle and we see the potential for higher volatility in the equity market into 2025 – all of which bode well for the price of gold.”