For a brief moment last year, the exchange-traded fund held in greatest value by investors had nothing to do with the S&P 500 index. Or stocks of publicly traded companies of any sort.

Instead, it was an ETF that took stock in a metal: gold.

The fund was SPDR Gold Shares from State Street Global Advisors, the firm that kickstarted the entire $1 trillion ETF industry with the 1993 launch of the SPDR S&P 500, which did, in fact, have as its base holdings of stocks in that widely watched and used index.

But on Aug. 18, 2011, SPDR Gold Shares were worth more, in toto, than all shares held in the SPDR S&P 500, long the undisputed leader in overall size.

At that moment, though, shares of stocks in public companies were reeling as were the values of SPDR S&P 500. That was due to the first-ever downgrade of U.S. debt by a major ratings agency, on Aug. 5, and nervousness over the U.S. deficit, debt and economy.

At the same time, the threat of a European sovereign debt collapse sent investors looking for a safe haven. For thousands of years, that has been gold.

With gold prices up and stock prices down, $76.7 billion was held in GLD shares and $74.4 billion in SPY shares on Aug. 19. The moment didn’t last. Four trading days later, SPY was back on top.


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But the moment showed just how broadly accepted investing in a share of a fund that in turn holds bullion has become.

Indeed, says Kevin Quigg, global head of ETF strategy and consulting holding at State Street, gold is on the verge of becoming a "set piece of asset allocation’’ in the minds of institutions.

Its slice of the investing pie in a diversified set of holdings, next to stocks and bonds and other alternatives? Somewhere between 3% and 5%.

Gold, in the form of shares in an exchange-traded fund such as GLD, “is increasingly becoming part of a diversified investment portfolio,’’ said Greg King, head of Exchange Traded Products at Credit Suisse.

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The 3% to 5% slice?

It’s been higher. When inflation was roaring in double digits in the late '70s and early '80s, some institutions kept as much as 20% of their holdings in gold, typically in bars or other physical forms back then.

In many investing quarters, in the past, gold also has been viewed almost interchangeably with other commodities, from oil to corn to coffee to copper, by many institutions.

But now, Quigg contends, it’s becoming regarded as a separate asset class, almost if by groundswell. A store of value. A hedge against risk. A bet on the metal itself. A hedge against inflation. “It’s all of those things,’’ he said.

GLD, for many institutions and individuals, has been better than holding gold because it’s quicker to buy and sell as needed, and no special housing is required.

For instance, State Street Global Advisors holds 40.3 million ounces or 1,254 tons of gold in its vault. And it sells shares in the GLD fund at the rate of one-tenth of an ounce a share.

In practicality, the “index” for the fund is the price of gold and rises or falls accordingly.

And even though gold has fallen from its record high of $1,895 an ounce in early September, the returns have been far better than stocks for far longer.

Since inception of the fund in November 2004, the average annual return has been 18.72%. By comparison, the S&P 500 index has risen from 1,211.92 on the last trading day of 2004 to 1,257.60 on the last day of 2011. That’s a return of 3.7% over seven years, equivalent to 0.5% a year.

Investors were so enthusiastic about the chance to invest in gold through the indirect mechanism of ETF shares that State Street pulled in $1 billion to GLD in its first three days of operation.

And even with a pullback, as European Union nations moved toward approving the European Stability Mechanism rescue fund, the 420.3 million shares in the fund were worth a total of $70.5 billion at the end of trading on Jan. 27.

The fund is not alone in capitalizing on gold. Nor is it the lowest cost fund. The expense ratio for GLD is 0.40% of assets over the course of a year. By contrast, the second largest fund, BlackRock’s iShares Gold Trust, has an expense ratio of 0.25%, King notes. It has total assets of about $9.7 billion.

Partly because of the rise of ETFs, demand for gold bullion is increasing. In the third quarter of 2011, demand for gold increased 6% from the same period a year earlier. Demand was 1,054 tons, worth $57.7 billion.

And the reason for the growth? Investors, according to the World Gold Council. “A strong rise in investment demand drove the growth in overall demand, as investors across the globe sought wealth preservation, portfolio diversification and strong returns,’’ it said.

In that quarter, in fact, demand for gold from investors snuck past demand from jewelers, the long-time source of greatest and most consistent demand. Demand from the jewelry market fell 10%, year over year, to 465.6 tons. Demand from the investment market was 468.1 tons. Demand from the technology industry remained far behind at 120.2 tons.

Most notably, demand for ETFs and similar products led to demand for 77.6 tons — 58% above the previous year.

SPDR Gold Shares is one of the top 10 largest holders of gold in the world, behind France and ahead of China. But that doesn’t mean investors actually hold gold.

Shares in an ETF such as GLD are more like mortgage-backed securities than mutual fund shares or listed stocks, says investment advisor Catherine Austin Fitts, a former managing director at Dillon Read & Co.

What the investor holds, she says, is an undivided interest in the underlying asset, not an equity interest in an entity. There is no deposit insurance, she notes, and, in her strongest critique, she says, GLD is a vehicle “by which investors provide the banking community with the resources to control and manipulate the precious metals market without adequate compensation.’’

Gold, the metal, typically runs in cycles, of course. Right now, it’s on a 10-year tear, the longest it has experienced. But, if world economies right themselves, the price could fall dramatically, spurring a downward spiral.

That’s because “as the price of gold falls and investors flee GLD and other gold ETFs, these ETFs will have to drop physical holdings,’’ says Justin Dove, executive editor of Investment U, a financial website.

“Considering GLD has more gold than China, this could easily flood the market. Depending on the scale of the drop in gold prices and the evacuation from GLD, things could get really ugly, really fast,’’ he contends.