Investors are hunting for portfolio protection and diversification in a pot at the end of the rainbow.

Inflows into gold-backed exchange-traded funds (ETFs) recently hit a four-year high, according to Bloomberg. The World Gold Council, meanwhile, reported that global gold ETFs brought in $10 billion in September, boosting third-quarter inflows to a record $31 billion. The US alone added $3.8 billion last month.

Typically, investors sell gold, a nonyielding asset, when interest rates rise, in order to take advantage of interest-bearing assets. When rates climb, the US dollar also tends to get stronger and gold becomes more expensive (and less appealing) to foreign investors. But while gold’s price has risen in recent years, much of September’s inflows took place as the precious metal’s price was falling and interest rates moved higher.

“That suggests investors are looking beyond the next Federal Reserve decision or short-term market fluctuations,” said Matthew Smart, chief investment officer at WWM Investments. “Investors are looking for ways to preserve wealth and diversify against risks that may persist well beyond the current economic cycle.”

Leprechaun-Style Diversification

The recent move back into gold was part investors reengaging, following the tactical low from over the summer, but also part diversification need as long-duration Treasurys remain challenged, said Todd Sohn, chief ETF strategist at Baird Strategas.

Gold has long been a safe-haven asset thanks to its scarcity, liquidity and historical ability to preserve purchasing power. Recently, that appeal has grown:

• Investors and portfolio managers are increasingly interested in assets that offer diversification beyond traditional stocks and bonds, particularly those whose performance is driven by different economic factors, Smart said.
• Gold has delivered impressive returns over the past several years, and that performance has brought renewed attention to an asset class that was historically viewed primarily as a defensive holding, he added.

But near-term inflows for ETFs linked to the precious metal aren’t necessarily shiny.

“Gold has competition in the form of higher real rates now and a recent USD rally too. So, I am curious how sticky the recent inflows will be,” Sohn says. “It’s a two-part equation with this, one being how gold performs going forward, and two, what rates do.”

Not Always Lucky: Even though gold has enjoyed an “extraordinary run” over the past several years, the price fall in September was a good reminder that even strong investor demand doesn’t guarantee higher prices, Smart said. “Like any investment, the price you pay matters, and investors should be careful not to let recent performance dictate their long-term decisions.”

Ask an average Joe what they know about exchange-traded funds and you’ll probably get crickets. Mention QQQ and you might get a glimmer of recognition. The Nasdaq-100-tracking index fund has been around since 1999, and with more than $500 billion under management, it’s one of the largest ETFs on the market.

“In all of that time, the options ecosystem has grown, the number of market makers, traders, how people use it has grown,” said Brian Hartigan, Invesco’s global head of ETFs and index investments. “It’s grown up to become one of the most liquid and highly traded vehicles in the world.”

Late last month, Invesco launched its Nasdaq International Innovators 100 ETF (QQI), which tracks large- and mid-cap international companies. This addition to Invesco’s Innovation Suite rounded out the product line to six ETFs, and Invesco isn’t done. ETF Upside caught up with Hartigan to discuss what’s next for the suite, innovations around the ETF wrapper and why they have no plans for golf partnerships any time soon.

You recently launched QQI, and you’ve got a couple other Q series funds in the works. What’s next for the suite?

The US isn’t the only innovative country in the world. Investors are probably underinvested in international as a whole, partly because of the way the US markets have run, but also just not-so-exciting returns or ways to allocate. So we think that’s a good opportunity. In terms of how we expand, I think we’ll continue to try to be ubiquitous in some ways with the Qs, and that’s cross-listing, that’s engaging globally with clients because some clients may want a UCITS or a London registered, and some may want the liquidity of a ‘Q.’ So continuing to promote Q as a whole, but starting to branch out with other Nasdaq listings and innovative listings across the globe.

Pulling the camera back to the wider ETF market, what do you think is going to be the next big development for ETFs, and how is it going to matter to investors and advisors?

Tokenization is interesting to the extent there’s demand for it, but where we’re looking at it is: What problem does it solve, or what utility does it create? Whether that’s efficiency in the trading, if it’s speed and settlements, if it’s a new create/redeem mechanism that’s quicker and frictionless, those are things that we’re looking at just around ETFs. … The prediction markets are interesting, but I think that’s more of a regulatory thing than it is an ETF thing. And private markets, same thing. There is a point at which everything doesn’t have to be in an ETF. So almost stepping back to say ‘ETFs, yes, they’ve continued to capture great new ideas and themes and ways for investors to invest, but I don’t know that you know everything has to move its way through to an ETF, particularly if it doesn’t make sense or adhere to the ETF core mechanics of pricing, transparency, and liquidity.’

And how are you thinking about tokenization?

Tokenization does more for asset classes than it does for ETFs because ETFs are liquid, they trade. I think tokenization into private markets could be interesting, depending on how that works, because if it creates quicker settlement, quicker access, more transparency and more investor access via shares or some sort of carved up component piece of an asset, then I think that could be interesting. But it’s less about ETFs than it is either investor demand or asset class applications.

I was recently at a Mets game, and I saw that QQQ is the official ETF of the New York Mets. I know that when QQQ was a unit investment trust, you had to spend a lot on marketing. But now with this new structure as an open-ended fund, I’m curious how Invesco plans to scale back or change its ad strategies, and whether this would affect flows.

For us, it’s a value, it’s a differentiator. Investors know QQQ from going to the Mets game, they understand to a certain degree what’s underneath it, the Nasdaq 100, and what that means. It’s helped us branch out. That spend has helped us take that and pivot not only to clients, but also to the innovation suite. If you don’t like Qs, or if you want it more concentrated, or if you’re concerned about a bubble, there are opportunities to hold different component pieces. We’re prepping for the branch out or the diversification.

And I say this as a Mets fan, but why the Mets? Wouldn’t you want a team that does a little bit better?

Well, they were dead on it last year. I’m a Cubs fan, so I’m happy to see the Mets give us a spot for two days only in the NL.

There are some things that we would do that were very highbrow, high net worth, but then it didn’t turn over. [Invesco’s NCAA sponsorship allowed] a different profile of potential investors. The profile that you get when there’s so many people watching over a shortened period of time, that does create high brand value. We always get asked, ‘Why don’t you do the Masters? Why don’t you do golf?’ And a lot of times it’s hard to stand out at golf tournaments. There’s a lot of similar peers, and it’s like, all right, how do we showcase that we’re different?