The ETF world has expanded rapidly over the last two decades, as investors now have access to almost every corner of the market. Typically, our ETF Spotlight series is focused on lesser-known funds or those with unique strategies. But this piece will focus on a very popular product, the Market Vectors TR Gold Miners ETF (GDX ) and some of the nuances of the gold mining industry and how that translates to ETFs.
Inside GDX's Strategy
GDX invests in a basket of publicly traded gold mining stocks of all market cap sizes from various geographical locations. For many investors, an investment in physical gold is not an attractive option. While gold offers some safe haven appeal and an inflation hedge, it does not make any dividend payments and is often at the mercy of heavy speculation in the markets. For that reason, many investors choose to invest in gold equities, as mining companies still offer gold exposure, but also pay out dividends and behave like a stock [see also 50 Ways To Invest In Gold].
It is no secret that GDX is one of the most popular funds in the ETF world, with billions in assets under management. But what many investors overlook is that the fund is not a pure play on gold. Many of GDX’s holdings are focused on gold, but also have significant operations in metals like silver and copper. The fund even has a few holdings (like Silver Wheaton) that are more focused on silver than they are gold.
Considerations on GDX's Performance
Naturally, GDX’s performance is tied to that of gold; the two tend to trend in the same direction (though that is not always the case). But when it comes to performance, investors often forget that gold miners tend to be something of a leveraged play on gold. As equities, these stocks are typically more volatile than their precious metal counterpart, meaning that a 1% jump in gold usually translates to a more than 1% jump in miners.
That trend can be easier to spot on a chart. Below, we show a year’s performance for GDX and the SPDR Gold Trust (GLD ):
As shown in the chart above, when GLD trends higher, GDX tends to do the same only with a more magnified movement. That process works in reverse as well, when GLD drops, GDX tends to drop more.
How to Use GDX in a Portfolio
GDX would almost never be used as a core building block in a diversified strategy, but it certainly has a place as a complimentary holding. Though it is technically an equity fund, GDX can more or less be thought of as commodity exposure, as its performance is more tied to the price of gold than any other factor.
Keep in mind that GDX will tend to be more volatile than gold prices themselves and any investor who takes a position should be ready to stomach some volatility.
The Bottom Line
The Market Vectors TR Gold Miners ETF has stuck a chord with investors, offering highly sought-after gold mining exposure in the ETF wrapper. Investors should be aware that the fund will not offer pure exposure to the gold mining world and that it tends to be more volatile.
Follow me on Twitter @JaredCummans.
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Disclosure: No positions at time of writing.