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Was iShares Gold Incident a Black Eye on ETFs? Hardly

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The weekend of March 5 was unkind to the ETF industry, from a media standpoint. A gold ETF from iShares temporarily stopped creating new shares until additional shares could be registered with the Securities and Exchange Commission. The ETF was the iShares Gold Trust (IAU).

Headlines varied, but all had the same message. The Wall Street Journal called it a “snafu,” writing:

“It was the latest bruise for the $2 trillion exchange-traded-fund business in the U.S., which has boomed in recent years, attracting investors with low fees and access to asset classes from foreign stocks to commodities.”

Barron’s categorized the event as a “hiccup,” while Investor’s Business Daily[i] identified it as merely a “bump.” No matter the phrasing, nobody reading the news that day would have missed it. 

What happened, exactly? The short of it is that demand for gold has been absolutely off the chain this year and demand simply cleaned out the shelves until a new shipment could come in. iShares took care of the issue swiftly, having new shares available by first thing the next trading day. Also notable is that investors could still buy and sell shares on Friday, March 4, despite the seemingly awkward situation.   

News outlets pounced. The pundits circled, sharpening their knives. Questions rang out: “Another black eye for the ETF industry?”  

Frankly, anyone longing for drama would do well to seek it outside of the ETF sector. 

It was indeed a mildly embarrassing situation for iShares, and the press coverage was unflattering for a few days, but when you think about it, it is hard to really fault them. It costs money to create shares. They surely felt that they had created enough supply beforehand, but the fact is, demand has simply exploded for gold recently — IAU is up 20% year to date, and in typical investor fashion, demand has followed.  

For investing professionals, ETFs are not new, but their value is certainly appreciated more and more every day. ETFs are indeed growing fast and getting more attention, in addition to new investors. This irritates some of the old guard. How dare this upstart gain more traction and threaten to oust the time-tested financial stalwarts, like mutual funds?

The fact is, ETFs are a superior technology to mutual funds (and I say that believing that mutual funds are great for investors).  For individual investors who lack the time, education, training, patience and the skill set required to invest well, there is no question that ETFs are the way to go. And while the naysayers will get their small bits in the spotlight on occasion, their brief opportunities to mock a small bump, a microscopic hiccup, they will find themselves quickly ushered back into the shadows as their weak hypotheses fill with holes.  

As for IAU, March 5 was a tough day.  It is never a good feeling to run out of supply and leave your customers frustrated and clamoring for more as you scramble to gratify their insatiable appetites. But then the supply truck comes. Then the shelves are restocked, and the customers are happy again. And your product, now readily available, finds scores of customers more than willing to buy and forgive a temporary shortfall. 


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