Europe's gold exchange-traded fund (ETF) market saw a surge in demand in 2020 as investors sought safe-haven assets during the uncertainty sparked by the coronavirus pandemic, Brexit, and other geopolitical concerns.
However, with future demand dependent on how various factors play out, European gold ETF providers could benefit from adopting some of the steps taken by their North American counterparts, according to the latest Cerulli Edge—Europe Edition.
"Over the past two years, there has been phenomenal growth in the global ETF market, particularly in Europe. When gold-backed ETFs were introduced around 17 years ago, they were dominated by North American funds, which captured a substantial portion of marketshare.
However, in recent years, European funds have narrowed the gap and held around 43% of the global marketshare by the end of February 2021," said Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates.
Last year, physical-backed gold ETFs globally had record annual net inflows of US$47.9 billion, or 877 tonnes, according to the World Gold Council. This collectively increased their gold holdings by more than a third. Europe saw inflows increase by 20.6%.
Several factors will determine the level of investment in gold ETFs during 2021 and beyond. In the final two months of 2020, the gold sector experienced outflows as investors reduced hedges and increased exposure to risk assets amid positive sentiment following the U.S. election and the announcements of COVID-19 vaccines.
However, demand for investing in gold via ETFs has remained strong. Last year, most of the inflows into gold ETFs were due to the improved opportunity costs of gold. As the global economy starts to recover, some of the investors who held gold for hedging or diversification purposes may feel they have less need for it.
Zumbo said that Europe's gold ETF players could benefit from evaluating steps taken by their counterparts in the US: "In Europe, there is still room for product innovation. US funds tend to have a more developed liquidity infrastructure, for example, with strong authorized participants that can provide the liquidity for investors to move in and out."
The management fees and costs of ETFs globally have fallen significantly over the past five years, and the same is true of gold ETFs. However, the gold market was one of the last areas of the ETF marketplace to start offering lower-cost options, and this has been driven primarily by gold funds in North America.
"Existing funds in Europe have started to cut charges and new funds have been launched with lower fees. However, costs depend on the region. There may be higher cost funds in some smaller, less liquid markets, whereas there is a lower average range in North America and Europe, where the secondary market provides deeper liquidity," added Zumbo.
Other findings included:
• A combination of factors is pointing to a boom in commodities to rival the supercycle of the early noughties. However, there are reasons to be skeptical. Cerulli believes the outlook for commodities will be shaped by two increasingly connected themes: the strength of the post-pandemic economic recovery and the acceleration of the transition to net zero.
• Consultants and large institutional investors in Europe are gravitating to private equity and hedge fund managers that not only have environmental, social, and governance (ESG) policies in place, but are also keen to improve their performance and meet their clients' reporting needs. Although alternative fund managers wishing to integrate ESG into their existing offerings face a number of challenges, particularly surrounding monitoring and reporting, overcoming these could lead to significant allocations.