Pick-and-shovel play

November 25, 2015 11:00 AM

Ask a trader to name one sector to avoid and the answer is invariably gold miners, which is stuck in a brutal downtrend channel that has seen a 78% drop since peaking in September 2011. But in times of crisis, investors go with what they know and the miners are traditionally a safe haven when equities correct, and were one of the few sectors that did well as global equity markets shuddered in August. With the miners putting in a base and sentiment indicators as negative as they get, the miners might be due for a rally. But before adding a fund to your portfolio, know that despite similarities, not all mining funds are created equal.

After years of losses, investors aren’t overwhelmed with options among the gold miners with only seven unlevered funds available. Investors may assume that the miners are interchangeable thanks to their nearly identical performance in 2015. Each fund has its unique benchmark but gold mining is a small industry and the most followed index is the NYSE Arca Gold BUGS Index, which reflects the highly concentrated nature of the industry as it only has 15 components. And concentration is what you’ll get when you buy any of the miners with the Market Vectors Gold Miners ETF (GDX), the most diverse player in the field with 35 holdings and only 55% in the top 10 holdings. Compare that to the Sprott Gold Miners (SGDM) with 25 holdings and 74% in the top 10.     

The major differentiator between the miners is their average market cap with sector heavyweight GDX clocking in at $3.1 billion while the Market Vectors Junior Gold Miners ETF (GDXJ) have a distinctly small-cap feel at just $500 million. But if investors vote with their feet, GDXJ is way ahead in the polls after pulling in $44 million in new assets in Q3. If you’re looking for a fund that’ll zig when the markets zag, GDXJ is for you, having delivered 1100-basis points of spread in August with a 5.1% return to the S&P 500’s 6.1% loss. However, it comes with higher volatility.  

But if you’re looking for a gold mining fund that’s different than the rest, put the Global X Gold Explorers ETF (GLDX) on your watch list. Like other mining funds, GLDX is concentrated with just 21 holdings, but one thing that sets this fund apart is a focus on micro-cap gold miners, those most likely to see an immediate impact from rising gold prices. It has a concentration in Canadian firms so keep an eye on the loonie. Another thing that makes GLDX unique is that it’s loss for the first three quarters of 2015 was only 12% compared to the 25.3% loss for GDX (see “Best in class”). GLDX’s outperformance was driven primarily by a 152% gain in its largest position, Gold Canyon Resources (GCU.V), which is not part of the Amex Gold Bugs Index most mining funds draw their investments from. 

Investors looking strictly for safety during troubled times might want to focus on cash, but for those with the stomach for volatility, the gold miners might be a valuable addition to your portfolio.

About the Author

Matt Litchfield is content editor for ETF Global (ETFG.com) and is responsible for all posts and new product updates on ETFG.com. @ETF_Global