Gold ETFs have become exceptionally popular as these instruments mitigate many of the most pressing drawbacks to gold ownership – wide bid/ask spreads, physical storage needs, and convenient buying and selling options. Investors have more than a couple of choices within the gold ETF space, including choosing between bullion-oriented funds, futures-oriented funds, and funds which hold gold miners stocks. As the largest gold miner-oriented fund, Market Vectors Gold Miners ETF (GDX) is an interesting option worthy of further exploration [see Free Report: How To Pick The Right ETF Every Time].
GDX gives investors exposure to gold prices through ownership stakes in gold mining companies. The Gold Miners ETF was launched in May of 2006 and has since accumulated nearly $10 billion in assets under management [see Mining Boom ETFdb Portfolio].
This ETF replicates the NYSE Arca Gold Miners Index – a modified market cap-weighted index that includes companies worldwide whose primary operations are gold mining.
What Makes GDX Unique
GDX stands out for having a mix of large, medium, and small-cap miners, as well as companies from a host of countries. As it is the only ETF to use the NYSE Arca Gold Miners Index, its weightings will be unique, though many of the prime holdings like Barrick Gold (ABX), Goldcorp (GG) and Newmont (NEM) appear in other precious metal and mining funds [try our Free ETF Stock Exposure Tool].
GDX is far and away the largest and most liquid mining-oriented ETF on the market. In fact, GDX is one of the relatively few funds that can challenge the well-known SPDR Gold Shares (GLD) ETF in terms of liquidity. With this popularity, GDX is also unique amongst ETFs in having an active and liquid options market, allowing investors to implement more sophisticated trading strategies.
How It Fits
GDX’s place in a portfolio depends at least in part upon an investor’s views towards the role of precious metals in a portfolio. Some investors believe that the lower correlation and inflation protection offered by precious metals make them a mandatory inclusion in almost all portfolios, while others believe they are suitable only for more speculative trading strategies [see also GLD-Free Gold Bug ETFdb Portfolio].
The rise of bullion and futures-based gold ETFs has decreased the correlation between the movements of gold bullion and gold mining equities. Nevertheless, gold miners do tend to offer more upside (and downside) when gold moves up (or down), though they can founder in periods where gold is rangebound and production costs are on the increase.
While GDX can serve as a compliment to help fill much of the diversification role of bullion or bullion-like holdings, this fund can also be useful as a tactical tool for playing anticipated trends in gold mining like improved (or worsening) cost efficiency.
What It’ll Cost You
GDX charges investors an expense ratio of 0.53%, which is slightly below the Commodity Producers Equities ETFdb Category average; similar funds carry expense ratios ranging from 0.35% to 0.85%. This fund also offers a small dividend, so investors should be aware of the tax consequences there. Furthermore, GDX is not presently available for commission free trading [see GDX Realtime Rating].
Under The Hood
The portfolio of GDX is only moderately diversified, as the fund holds about 30 securities. Roughly two-thirds of the fund’s total assets are concentrated in the top 10 holdings, giving this ETF a “top heavy” profile. The top holdings are the aforementioned Barrick, Goldcorp and Newmont, although investors should also realize that several of the top holdings have substantial operations in silver mining [see GDX Holdings].
The fund’s market cap-based index also results in a heavy skew towards larger companies. Large-cap companies (which the fund sponsor defines as $5B or more in market capitalization) make up more than four-fifths of the portfolio, while small companies (below $1 billion) make up an almost insignificant weighting.
Yield, Volatility and Performance
GDX pays out a dividend distribution once a year.
When it comes to risk and volatility, GDX has a beta that is substantially above the market, but this is not uncommon or unexpected for a commodity producers fund; as such, its expected volatility should fall above broad U.S. stock benchmarks over the long-term [see also 101 ETF Lessons Every Financial Advisor Should Learn].
For the five full years of the funds existence, GDX’s annual returns have been 16.8% (2007), -26.1% (2008), 36.7% (2009), 33.9% (2012) and -16.1% (2011). Those returns do differ significantly from that of gold bullion as reflected in the returns of GLD, which have been the following over those same years: 30.6% (2007), 5% (2008), 24% (2009), 29% (2010) and 9.6% (2011).
GDX does stand out for its size and liquidity among mining funds. Nevertheless, there are other options that investors should consider:
- PowerShares Global Gold and Precious Metals Portfolio (PSAU): This ETF holds more than twice as many securities as GDX, but it’s still heavily weighted towards its top-ten holdings and it features a higher expense ratio.
- Van Eck Market Vectors Junior Gold Miners ETF (GDXJ): This ETF is philosophically similar to GDX (they’re run by the same sponsor), however, it focuses on small and mid-cap mining firms instead. GDXJ holds a relatively large number of positions (more than 80), although it is more volatile and expensive than the large cap-focused GDX.
- Global X Pure Gold Miners ETF (GGGG): This ETF avoids exposure to mining companies with substantial exposure to metals other than gold, resulting in more of a “pure play”. Compared to GDX however, this fund is more expensive and far less liquid.
Disclosure: No positions at time of writing.