Gold ETFs have become very popular as an investment option. However, the recent slump in prices has affected the demand for gold ETFs and also somewhat tarnished its image as a gold haven.
To date, gold has dipped almost 35% from its all-time high in Sep 2011 when it touched $1,921 per ounce. This drop has technically put the yellow metal into the quagmire of a bear market.
In 2013, it was not one event that affected the gold market. A combination of factors - the Federal Reserve’s taper or no taper confusion, conflict in Syria and slowdown in Indian and Chinese demand - affected gold prices. (Read: Silver ETFs Tumble, Fresh Lows Next?)
Alarming Outflow in ETFs in 2013
The first quarter witnessed a 176.9 tons net outflow from gold ETFs due to falling prices, leading to an overall investment demand decline of 49%. In the second quarter, there was a record 402.2 tons net outflow from gold ETFs. This led to overall investment demand decline of 63%. (rRead: 3 ETFs to play platinum's coming shortfall)
The bridge between investors at the retail level and the investment level was never so apparent. Retail investors (in gold bars and coins) view gold for preserving wealth and hedging against inflation over the long term. Thus, in the second quarter, demand from retail investors leaped to unprecedented levels as they saw an opportunity to add to their holdings as gold prices dipped.
On the other hand, the institutional investors have a different perception with a short-term, speculative approach. Expectations of the US government tapering quantitative easing by the end of 2013 led to ETF investors losing confidence in gold as a safe haven. The price drop in the quarter prompted these opportunistic investors to sell their ETF holdings and shift to other investment options. Further price pressure could lead to continued outflow in the near term.(Read: 3 High Quality Dividends to buy this Holiday Season)
The recent decline in prices has dealt a severe blow to investors’ confidence for the yellow metal and it may take many months to restore. Even though it has resulted in major losses in the paper gold market, it has otherwise triggered a gold rush for the actual physical metal in the form of bullion, jewelry, bars and coins. Thus, gold prices will get support from retail demand for gold, particularly in India and China. Gold traders are eyeing an increase in physical demand from Asia, particularly from India due to the upcoming festive demand.
Furthermore, the selection of Janet Yellen to succeed Bernanke will bring back confidence in the market. Yellen has been a strong supporter of easy monetary policy and it is expected that she will not bring major changes to Fed’s policies in this turbulent times. This will improve investor sentiment and might support gold prices. (See All Precious Metals ETFs Here)
Demand for gold will continue to rise in the long term, thanks to the rising middle class in India, China and other emerging markets. The Euro-zone debt crisis will also be an important driver for gold demand. Furthermore, demand for gold bullion and coins are currently at unprecedented levels. It may, however, take months for this new demand to feed into prices, but prices will eventually stabilize.
Investors have fled the mining sector and two things need to happen before investors regain interest in gold mining stocks: gold price needs to rise and the industry needs to rebuild its credibility by delivering on promises of greater shareholder returns. The consumers who rushed to buy gold following the fall in prices might have to wait patiently for their anticipated returns to materialize. At current levels, one should invest in gold as a long-term investment, which will grow in value and add diversification to a portfolio. For quick returns, it is advisable to focus on other assets.
ETFs to Tap the Sector
Below, we highlight the ETFs in this sector in greater detail for those seeking to make a gold-mining ETF play at this time:
Market Vectors Gold Miners ETF
GDX is one of the popular gold ETFs on the market today with asset under management of $7.46 billion and a trading volume of roughly 61,840,423 shares a day. The fund charges an expense ratio of 52 basis points a year.
The ETF was formed on May 15, 2006, to track the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide that are involved primarily in gold mining, representing a diversified blend of small, mid and large-capitalization stocks. The fund holds 37 stocks in its basket, with a concentrated approach in the top ten holdings with 62.86% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Goldcorp Inc. (GG), Barrick Gold Corporation (ABX), and Newmont Mining Corporation (NEM) with asset allocation of 11.71%, 10.65% and 7.80%, respectively.
Market Vectors Junior Gold Miners ETF
Another popular choice in the gold miners ETF market is GDXJ, a fund tracking the Market Vectors Junior Gold Miners Index, which provides exposure to a small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining. The product has $2.28 billion in assets with a daily volume of 1,536,050 shares. It charges 55 basis points in annual fees and has a dividend yield of 8.57%.
The fund has a total holding of 71 stocks with approximately 91% weightage toward small cap companies and the rest in middle cap companies. It is widely spread with none of the companies holding more than 4.73% of assets. Argonaut Gold, Torex Gold Resources Inc (TXG.TO) and China Gold International Resources Corp Ltd (CGG.TO) occupy the top three positions in the fund with asset allocation of 4.73%, 4.54% and 4.06%, respectively.
Global X Gold Explorers ETF (GLDX)
The fund seeks to match the performance and yield of the Solactive Global Gold Explorers Index, which tracks companies actively involved in gold exploration.
The ETF has managed assets worth $29.3 million since its inception in Nov 2010. With a daily volume of more than 65,105 shares per day, the fund charges 65 bps in annual fees with a dividend yield of 12.09%.
It is spread across 20 small cap securities with the top ten holding 60.4% of assets. Torex Gold Resources, Volta Resources Inc. (VTR.TO) and Gold Canyon Resources Inc. (GDCRF) command the top three positions in the basket representing 6.62%, 6.62% and 6.56% of the net assets respectively.
iShares MSCI Global Gold Miners
The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI ACWI Select Gold Miners Investable Market Index. This index measures the equity performance of comps in both developed & emerging markets that derive the majority of their revenues from gold mining. The index also includes companies that do not hedge their exposure to gold prices.
The ETF has over $35.3 million in AUM and a daily volume of about 57,699 shares, while it is also a low-cost pick with expenses of 39 basis points a year. It has a dividend yield of 1.93%.
The fund debuted in Jan 2012 and currently has 38 companies in its kitty. The top stocks include Goldcorp, Barrick Gold Corporation, and Newmont with asset allocation of 15.81%, 13.95% and 9.84%, respectively.
PowerShares Global Gold & Prec Metals (PSAU)
PSAU was launched in Sep 2008 and has been designed to track the NASDAQ OMX Global Gold & Precious Metals Index. It has a trading volume of just 10,589 shares a day, but is a bit pricey as it charges investors 75 basis points on an annual basis. The fund represents a dividend yield of 0.50%.
This fund has a total holding of 66 stocks. Among individual holdings, Barrick Gold, Newmont and Goldcorp occupy the top three positions in the fund with asset share of 8.61%, 7.95% and 7.83%, respectively.
Global X Pure gold Miners ETF (GGGG)
The ETF is linked to the Solactive Global Pure Gold Miners Index, which tracks the performance of the largest and most liquid gold mining companies globally.
Formed in Mar 2011, the ETF has assets worth $3.55 million. With a daily volume of more than 141,111 shares per day, the fund charges 59 bps in annual fees with a dividend yield of 0.23%.
It is spread across 23 companies with the top 10 companies holding 55.36% of the total net assets. Sibanye Gold Limited (SBGL), Centamin Egypt Gold and Koza Altin Izletmeleri A.S. hold the top three positions representing 7.13%, 6.57% and 5.64% of the net assets, respectively.
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