There's a new top dog in the ETF universe. But does its huge rise mean you should go out and buy it right now?
Last Friday, the SPDR Gold Trust (NYS: GLD) passed up the stock market-tracking SPDR S&P 500 Trust (NYS: SPY) to become the largest exchange-traded fund by market cap. With more than $76 billion in assets under management, the SPDR gold ETF owes its new top ranking to both superior performance of the yellow metal, as well as huge investor demand. Just at the beginning of 2011, the S&P SPDR had more than half again as many assets as the gold ETF.
Moreover, as gold approaches the $1,900 level while stocks can't seem to recover from their recent dive, the trend favoring precious metals seems poised to continue. That raises an obvious question: Even after the huge run that gold has already had, does investing in gold make sense?
All that glitters
Opinions about gold run the gamut. Some believe that as a historical store of value, gold will be the best commodity to survive a collapse in confidence of fiat currencies, and so putting a huge chunk of your investment capital into gold is the only prudent move given today's economic uncertainties. Others argue that since gold produces no income and doesn't grow, it's intrinsically inferior to other investments and therefore deserves no place in anyone's investment portfolio.
But today, I want to look at the gold question from a different angle. By looking at the history of top-dog investments, you may be able to predict gold's eventual fate by seeing how its predecessors on the top rung of the investment ladder performed.
Stocks at the top
One of the first lessons investors ever learn is not to chase performance. Yet going after stocks or funds with the biggest market caps is almost the definition of performance chasing -- if the sole reason for chasing is because of their size.
Moreover, stocks that reach the pinnacle often suffer the same curse top-ranked college sports teams face when they hit the cover of Sports Illustrated. Consider these former top stocks:
- General Electric (NYS: GE) was the top market cap stock as of 1998. In the past 13 years, the stock has lost an average of 2.5% annually -- even including dividends.
- Microsoft (NAS: MSFT) took over the reins as the market leader in 1999. It has lost almost 3% per year since then.
- Cisco Systems (NAS: CSCO) and Intel (NAS: INTC) took turns during 2000 as market leader, leapfrogging over Microsoft. Cisco has lost a staggering 12.7% per year since then, while Intel has dropped 10% annually.
- By 2006, ExxonMobil had passed GE for the top spot. Over the past five years, it's managed a positive return of about 2% -- exceeding the overall market's gains but hardly a stamp of approval for the company.
What the future will bring
None of this proves that the SPDR gold ETF is doomed to failure. In fact, many of the macroeconomic trends that have supported its stratospheric rise thus far are still firmly in place and see no signs of reversing anytime soon. Low interest rates reduce the cost of carry for gold, making it easier for investors to hold onto it. Central banks around the world have actually added to positions recently despite high prices.
There are other ways to make money from gold, such as by investing in mining stocks. But unlike miners, bullion-oriented gold ETFs don't give investors any company-specific risk. That can come in handy, especially when miners have operating problems that hurt their financial results even when gold prices are high.
With gold prices high and the stock market low, now isn't the ideal time to move money out of stocks and into gold. Holding a small percentage of your assets in safe-haven investments can make sense as much as an insurance policy against economic catastrophe as for a prudent investment. But going much beyond that is merely a speculator's bet -- and while such bets can pan out well, they can also cost you everything you invest.
ETFs give you great exposure to much more than just gold. Read the Fool's special free report on "3 ETFs Set to Soar During the Recovery" and figure out what your next step should be.
At the time this article was published Fool contributor Dan Caplinger has a stash of gold coins but doesn't own shares of the companies or ETFs mentioned in this article. You can follow him on Twitter here. The Motley Fool owns shares of Microsoft, Apple, Intel, and Cisco, as well as having a bull call spread position on Cisco and having bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Cisco Systems, Apple, and Microsoft, along with creating bull call spread positions in Apple and Microsoft and a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is top dog around our house.
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