European exchange traded fund flows in July suggest that passive investors have not entirely banished global fears from their minds, despite global stock markets hovering near record highs amid low volatility in equity markets.
Looking at Morningstar data for July, commodity funds enjoyed net inflows of €7.1 billion, a rise of nearly 17% in the year to date. Swiss-domiciled UBS ETF was the most popular fund, with €660 million invested in July alone.
iShares Physical Gold ETC (EGLN) saw outflows of €206 million in July, although the fund flow is positive by €119 million in the year to date.
Ali Masarwah, Morningstar’s Director of Editorial Research for EMEA, said: “Commodity exchange-traded products rebounded in July thanks to high inflows for gold ETFs, which had seen tepid demand in June.”
Gold spot prices had a strong start to the year, rising from $1,100 an ounce to $1,280 an ounce in April, but have struggled to reach $1,300 since. Rising geopolitical tensions, particularly between the US and North Korea, have supported the valuations of safe havens such as gold, even as stock markets have remained at elevated levels.
Oil has been sold off amid concerns over the growth prospects for the world economy – WTI dropped below $50 a barrel in April and has failed to hold any gains above this level since that date. Many listed mining firms have high copper exposure as the metal is strongly correlated with Chinese industrial demand, which has so far defied predictions of a slowdown. COMEX copper is now trading close $3,000 a tonne after a strong run this year.
For investors who are looking to purchase ETFs that back physical gold, Morningstar passive analyst Kenneth Lamont suggested two funds.
They are Source Physical Gold P-ETC (SGLP) and ETF Securities Gold Bullion Securities ETC (GBSS). Lamont said Source Physical Gold P-ETC is an impressive product with very tight spreads.
For those who want that extra layer of security, they may look at the ETF Securities Gold Bullion Securities ETC, which goes one stage further and allows investors to physically access that gold if necessary at some point in the future, said Lamont. Investors seeking equity-based exposure can consider the iShares Gold Producers iShares Gold Producers UCITS ETF (IAUP).
“Modern portfolio theory shows that adding a commodity such as gold to a stock and bond portfolio has historically produced lower volatility and increased risk-adjusted returns. While falling gold prices in booming markets may reduce returns, the potential gains in more turbulent market conditions can offset falling prices in other assets classes,” he added.
