By Lewis Braham

Wall Street rewards greed in the short term, but punishes it in the long term. Bubbles burst.

Right now, investors in gold mining stocks are in the gluttonous phase. The average fund in Morningstar's equity precious metals category surged 43.8% in the third quarter, double the 21.9% and 21.2% respective gains for the second- and third-best performing fund categories -- digital assets and the China region.

Year to date, the $22 billion indexed VanEck Gold Miners exchange-traded fund is up 125%, versus 46% for the $125 billion SPDR Gold Shares, which invests directly in bullion. The healthy 8.1% return this past quarter for the $1.4 trillion Vanguard S&P 500 ETF seems pedestrian by comparison. The $367 billion Vanguard Total Bond Market ETF gained 2%, a little better than the bond income it pays.

Historically, gold miners have a leveraged relationship to bullion prices. Once gold prices exceed miners' production costs, every dollar above that cost is pure profit. If bullion prices rise above cost from $100 to $200, for example, profits literally double. The median all-in sustaining cost for gold miners to produce an ounce was recently $1,600. With gold bullion spot prices currently at $3,863, profit margins are exploding.

But to exploit high bullion prices, if history is any guide, mining executives will soon stuff company balance sheets with leverage and overexpand their operations, raising their debt costs until the bubble bursts. Bankruptcies spiked when gold prices slumped in 2013. Bullion is the safer bet, a real hedge for one's portfolio that will never go bankrupt.

Of course, a gold miner's business has a measurable cash flow and valuation while bullion does not, but gold's use as a hedge is thousands of years old. Cryptocurrencies Bitcoin and Ethereum are newish in comparison, but also produce zero cash flow. They still seem a poor hedge and more of a leveraged bet on speculative tech stocks -- a weakness exemplified in the quarter's final days when a major crypto selloff occurred as investors got nervous about signs of U.S. economic weakness. Bullion continued to rise during that selloff.

Overall, though, the quarter was a strong one for Ethereum, following the July passage of the Genius Act, which aims to bring stablecoins into the financial mainstream. Ethereum, unlike Bitcoin, is more flexible in its uses, being a necessary building block for the digital architecture of most stablecoins, which are digital tokens pegged to a stable assets like Treasury bills. The $16 billion iShares Ethereum Trust ETF was up some 65% this past quarter as a result, versus just 6.2% for the $88 billion iShares Bitcoin Trust.

Among funds holding digital assets, the best performers were ProShares Ultra Ether and 2x Ether. Both ETFs are leveraged to produce two times the daily Ethereum return, and were up about 130% each in the quarter.

There was the usual assortment of ultra-risky leveraged single-stock and sector funds at the top and the bottom of the charts this past quarter. The tiny $8 million Tradr 2X Long RGTI Daily, doubling the performance of quantum computing company Rigetti Computing, was first, up over 375%. More relevant than such small fry was the 181% gain of the $1.7 billion MicroSectors Gold Miners 3X Leveraged.

Given the S&P 500 index's strong gains, it's little wonder that assets kept pouring into index funds. The Vanguard S&P 500 ETF saw $21.6 billion in new inflows during the first two months of the quarter ended on Aug. 31. (September numbers aren't available yet.) The iShares Core S&P 500 took in $10.6 billion. Those two ETFs combined account for more than the entire $22 billion inflow for the large blend fund category in the quarter as a number of traditional active funds experienced outflows. Vanguard Primecap saw $4.4 billion in outflows, even though the fund has rebounded strongly in 2025, up 18% this year, after trailing in previous years because of a healthcare sector overweight.

Actively managed ETFs received $86.5 billion in new inflows in the quarter, exceeding the $75.1 billion in outflows from active mutual funds. The ETF-ication of active management is working because fees and tax-efficiency are better for ETFs. Still, passive indexed ETFs received $158.6 billion.

Most surprising is the surge of inflows into money-market funds. Some $135 billion went to Morningstar's money market-taxable fund category, making it the most popular one in the quarter and accounting for almost all of the $140 billion added to the category so far this year. Given that short-term interest rates are now falling, the funds should be less appealing unless investors, concerned about a crash, are sitting on the sidelines in cash.

There is evidence of such fear. The average large growth fund had a strong quarter, up 7.6%, but the category in aggregate lost $14.1 billion in outflows through Aug. 31. Still, that was mainly from large growth mutual funds like American Funds Growth Fund of America, which lost $3.8 billion for all of its share classes, not ETFs such as Vanguard Growth, which saw inflows.

While the Vanguard Growth portfolio's 33 price/earnings ratio merits caution, investors are also fleeing small-cap funds. After years of underperformance, small-cap funds had a strong quarter because of the prospect of falling interest rates, as small businesses are more dependent on debt financing to grow. The average fund in the small blend category gained 8.3% in the quarter. The iShares Russell 2000 Value, which focuses on cheaper stocks, has a 13.8 portfolio average P/E and gained 12.5%. Yet small value funds saw $2.9 billion in outflows, and small blend, $10.3 billion.

Perhaps the fattest pitch for investors this year has been foreign stocks. They're cheap valuation-wise, offer good diversification, and are often less volatile than U.S. small-caps. The $526 billion Vanguard Total International Stock ETF has an average P/E of 15 and is up 27% this year, versus the S&P 500's 15% return and 24 P/E. Yet the foreign ETF received just $3.6 billion in new money in the quarter -- a fraction of Vanguard's S&P 500 ETF. The foreign large blend category received $16.9 billion -- better, but perhaps an indication that the greedy haven't overtaken the fearful yet overseas.

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October 03, 2025 01:00 ET (05:00 GMT)

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