In recent years ETFs have become popular tools for pursuing a wide range of investment objectives. As the product lineup has become more granular in nature, investors have turned to exchange-traded products as a way to tap into narrow segments of the global stock market; the current product offerings include a number of funds that zero in on very specific industries. Gold mining stocks have been the target of growing interest in recent years, as investors have sought out ways to play precious metals. And in many cases, those seeking out gold miner stocks are using the exchange-traded structure to get there; currently, there is more than $7 billion invested in gold miner ETFs.
Gold Miner ETFs 101
Gold mining stocks generally appeal to those looking to increase their allocation to gold, but are interested in doing so through securities that generate cash flows. Whereas a bar of gold bullion will never make a dividend payment, gold mining stocks have underlying fundamentals that can serve as a basis for valuation [see also GLD-Free Gold Bug ETFdb Portfolio].
Like just about every other company, the profitability of gold miners depends on the price they are able to charge for their products. When gold prices rise, miners are able to charge more–and vice versa. Because the cost structure is relatively fixed, it makes sense that spot gold prices are a major factor in the cash flows generated by mining stocks. Just as Apple (AAPL) income climbs if the tech giant is able to charge more for its gadgets, the earnings of companies like Barrick (ABX) and Goldcorp (GG) get a boost from higher gold prices.
Factors To Consider
Besides obvious factors such as expenses and liquidity, there are several other factors that should be considered when shopping around for a gold miner ETF:
Operations Of Underlying Stocks
Nowadays there are few “pure play” companies in any sector; most modern corporations have operations in a wide range of businesses. That’s certainly true for miners; it’s relatively common for companies that mine for gold to also focus on silver, copper, and a number of other metals. When evaluating potential gold miner ETF investments, it’s wise to see just how much of the underlying earnings are derived from gold [see also 50 Ways To Invest In Gold].
In some cases, the answer might surprise you. For example, Silver Wheaton Corp. (SLW) is a major holding in some of the most popular gold miner ETFs.
Impact of Hedging
Many investors considering gold miner ETFs are interested in indirect exposure to gold. So it’s probably safe to assume that many are bullish on the price of the underlying precious metal. But it should be noted that a jump in gold prices does not always translate into a surge in earnings. That’s because many gold miners hedge out their exposure to eliminate big swings in earnings, essentially locking in prices and reducing the short-term impact of price movements on their operations. Of course, changes in gold prices still impact earnings over the long haul–but be aware that changes in spot price might not always have the impact you expect [see also Five Things We Learned At Inside ETFs].
Unfortunately, there’s no easy way to tell what percentage of a gold miner ETF portfolio hedges out its exposure; figuring this out takes a bit of additional research. But for those seeking indirect exposure to gold prices, this factor is worth considering very carefully–it can have a dramatic impact on the risk / return profile.
Large Miners vs. Small Miners
The universe of gold mining stocks covers a wide spectrum of risk; large gold mining firms are often relatively stable companies with somewhat predictable cash flows, while smaller mining firms can be much more speculative and experience big swings depending on their ability to find and extract the precious metal. Smaller mining companies are often an opportunity to literally strike gold (or go bankrupt) while bigger miners generally have backlogs of projects. As such, small cap mining stocks can offer potential for big returns–along with some substantial risk [see also Gold Miner ETFs: Breaking Down All The Options].
This item is a relatively standard consideration; it’s always a good idea to examine the fees charged by an ETF. In the case of gold miner ETFs, there can be a relatively wide gap; PSAU charges 0.75% annually, while RING charges just 39 basis points.
Gold Miner ETF Options
The most popular ETF choice for investors seeking exposure to gold miners is the Market Vectors Gold Miners ETF (GDX). With over $5 billion in assets, GDX is extremely liquid.
But GDX is not the only game in town. Other gold miner ETF options include:
|Assets||$5.7 billion||$4.2 million||$1.9 billion||$18.8 million|
|Largest Holding||Barrick Gold||Koza Altin Izletmeleri||Alamos Gold||Barrick Gold|
|% Small / Micro Cap Stocks||3.5%||19.5%||64.3%||6.9%|
|As of May 2012|
- Global X Pure Gold Miners ETF (GGGG): As the name suggests, GGGG focuses on companies who focus exclusively on gold. That means no miners with material revenues derived from silver, platinum, palladium, or any other metal. For investors looking for the strongest possible correlation to spot gold prices, GGGG might be worth a closer look.
- Market Vectors Junior Gold Miners ETF (GDXJ): This ETF is perhaps ideal for those looking to establish exposure to smaller, more speculative gold mining stocks. GDXJ’s holdings differ dramatically from GDX, and this ETF has the potential to deliver huge returns (there is, of course, a considerable amount of risk as well).
- MSCI Global Gold Miners Index Fund (RING): This ETF should appeal to the cost conscious investors out there; RING charges just 0.39% in expenses, which makes it the cheapest in the group.
Disclosure: No positions at time of writing.