Global X Planning Gold, Silver Miners ETFs

by on February 4, 2010 | ETFs Mentioned:

Over the past six months, New York-based Global X has introduced a line of sector-specific China ETFs, many of which have already seen impressive cash inflows and daily trading volumes. Now the upstart ETF issuer is turning its attention to commodities, filing for approval on four funds tracking indexes composed of mining stocks. The ETFs include:

  • Global X Copper Miners ETF: This ETF would be linked to the Solactive Global Copper Miners Index, a market capitalization-weighted index that is designed to measure broad based equity market performance of global companies involved in the copper mining industry.
  • Global X Gold Miners ETF: This ETF would be linked to the Solactive Global Gold Miners Index, a market capitalization-weighted index that is designed to measure broad based equity market performance of global companies involved in the gold mining industry.
  • Global X Platinum Miners ETF: This ETF would be linked to the Solactive Global Platinum Miners Index, a market capitalization-weighted index that is designed to measure broad based equity market performance of global companies involved in the platinum mining industry.
  • Global X Silver Miners ETF: This ETF would be linked to the Solactive Global Silver Miners Index, a market capitalization-weighted index that is designed to measure broad based equity market performance of global companies involved in the silver mining industry.

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Latest Trend

In the last five years, commodity ETFs have become tremendously popular, as investors have embraced products offering exposure to an asset class that was previously available only to large, sophisticated traders. In 2009, commodity products saw cash inflows of $30 billion, more than a quarter of all ETF inflows for the year. Total commodity ETF assets have grown to nearly $75 billion from zero only a few years ago.

While some commodity products buy and hold the underlying commodity, the physical properties of most  natural resources make this investment strategy impractical. As such, most commodity products utilize a futures-based strategy to provide exposure, rolling their holdings as the contracts approach expiration to avoid ever taking possession.

But as anyone who has invested in UNG can attest, there are some potential drawbacks to a futures-based strategy, including the potentially-detrimental impact of an upward sloping futures curve. Not surprisingly, ongoing innovation in the ETF industry has expanded the options investors have for gaining exposure to commodity prices. Several ETFs have been introduced that invest primarily in equities of commodity producers. Since the profitability of these companies generally exhibits a positive correlation with prices of the underlying commodities, these stocks are impacted by changes in spot prices of the relevant resources.

But commodity exposure through equities has its own potential disadvantages. These funds are obviously impacted by the performance of equity markets as well, meaning that one of the primary benefits of adding commodities to a portfolio–low correlation with other asset classes–is mitigated to a large degree. IndexIQ has come up with an interesting solution with its Global Resources ETF (GRES). In addition to long positions in global commodity producers, GRES establishes a partial equity market hedge through short positions in the S&P 500 and EAFE indexes, essentially isolating the exposure to commodity prices.

Stiff Competition

Global X pioneered the concept of sector-specific China ETFs, but the issuer’s proposed mining funds could encounter significantly more competition. There are already a handful of companies focusing on the metals and mining markets, although most aren’t as targeted as the proposed metal-specific ETFs:

  • Market Vectors Gold Miners ETF (GDX): The success of GDX (nearly $5 billion in assets) demonstrates the huge interest in “indirect” commodity investing. In recent months, GDX has effectively served as a leveraged play on gold bullion prices, generally moving in the same direction as spot prices while exhibiting significant volatility.
  • Market Vectors Junior Gold Miners ETF (GDXJ): This ETF invests more heavily in small cap companies engaged in development of new sources of gold, either through greenfields exploration or the use of new geological models to search for gold in overlooked and abandoned areas. As such, components of GDXJ generally have less stable cash flows than those of GDX.
  • Dow Jones Emerging Markets Metals & Mining Index Fund (EMT): This ETF focuses exclusively on mining companies in emerging markets economies, giving the heaviest weightings to China, South Africa, Brazil, and Russia. Unlike GDX and GDXJ, this ETF invests in companies engaged in the mining of a variety of metals, including platinum, nickel, and gold.

No expense ratio data for the proposed funds was included in the SEC filing.

Disclosure: No positions at time of writing.