This May Be A Gold ETF, But It Is Not Golden

’ve done a number of articles on dollar-weighted returns in mutual funds.  There are rare cases where the shareholder base is smart, usually in value funds, where the shareholders add more money on declines, and lighten up when things are going too well. Tonight’s target is the Gold ETF SPDR Gold Trust (NYSE:GLD).  As with most volatile mutual funds, people tend to get greedy or panic.  They chase performance.  Consider this list of inflows and outflows from Gold ETF SPDR Gold Trust (NYSE:GLD). Cash flows are assumed to occur at mid-period.

This May Be A Gold ETF, But It Is Not Golden

Gold ETF

Date Cash Flow
9/30/2004              13,081
3/31/2005        2,902,381
3/31/2006        3,152,826
3/31/2007        4,129,118
3/31/2008        5,163,301
3/31/2009     10,326,761
3/31/2010        8,197,457
3/31/2011     (3,046,769)
3/31/2012        5,499,978
3/31/2013   (18,958,700)
11/15/2013     (4,320,084)
12/31/2013   (30,887,920)
Dollar-weighted 8.20%
Time-weighted 11.13%
Difference -2.92%

Versus a buy-and-hold investor, the average holder gives up almost 3% of returns via market mistiming.  Technicians may talk down buy and hold, but buy and hold usually outperforms the average trader.  This is similar to what my friend Josh Brown talks about in his article Flows Don’t Follow Value, They Follow Performance.  Very few investors are rational businessmen, estimating likely returns over their funding horizon.  Rather they chase past success, and flee past failures.

Such has been true of the Gold ETF SPDR Gold Trust (NYSE:GLD).  Say what you will about the cheapness of large ETFs, people will still misuse them.  They will buy late in a bull phase, and sell late in a bear phase.

And so I say to all: Guard your emotions.  Be forward-looking.  Analyze likely value five years out.  Don’t make snap decisions out of regret.  Think about risk control before you buy shares, bonds, whatever.

Now, as a personal aside, it took me around eight years to learn to control my emotions.  Over the last 20 years, I have made at most a handful of errors reacting to bad market events.  I learned to analyze rather than panic back in the 90s.  It doesn’t mean that I am always right, but it does mean that I act.  I almost never react.

As for GLD, be wary about paper gold.  Is it really fully collateralized by audited gold in a warehouse?  There are lots of promises of gold being traded, but how much physical gold could you have delivered to you, should you want it?

That’s all for now.  Be careful in all of your investing; it is easy to err.




About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.