Gold miners experienced a truly brutal 2013, as many funds and stocks in this space lost half of their value (if not more) in the one year time frame. However, 2014 has been a completely different story, as gold miners have done pretty well overall, though they have seen extreme volatility.
In fact, many gold mining benchmarks are up nearly 20% on the year, easily crushing the S&P 500 in the same time frame, even with the recent mid-July slump. And since the gold mining industry currently has a favorable Zacks Industry Rank and decent prospects if market volatility picks up, interest in this space could continue to rise in the second half of the year (read Will the Uptrend in Gold Mining ETFs Continue?).
This positive backdrop could be excellent news for Sprott and their gold mining ETF which just hit the market. This new fund, which goes by the name of the Sprott Gold Miners ETF, trades under the symbol of SGDM, and looks to offer investors interested in the gold mining industry a new way to play the space.
What Makes This Fund Different?
The gold mining space already has a decent number of options that stretch across a variety of types. Easily the most popular is the Market Vectors Gold Miners ETF (GDX - ETF report) which has over $8 billion in AUM, though (GDXJ - ETF report) and (RING - ETF report) are solid options too. This latest fund from Sprott though, looks to take the ‘smart beta’ craze which has been hitting the ETF world and apply it to the gold mining space, hopefully resulting in some outperformance.
This process is accomplished by tracking the Sprott Zacks Gold Miners Index, which focuses on 25 gold miners that have high betas compared to the price of gold, keeping the overall basket small. This allows for each company to receive a decent weight in the benchmark, and thus contribute to overall performance (read The Guide to Gold Mining ETFs).
The weights for this group are determined not by market cap but instead by looking at which have the highest quarterly revenue growth measured on a year-over-year basis, and stronger relative balance sheets as measured by long-term debt to equity levels. Additionally, the index will be rebalanced quarterly, ensuring that the latest company results are reflected in the index, and thus SGDM as well.
Surprisingly, investors have to pay just a little bit extra for this exposure, as costs come in at 57 basis points a year, compared to 53 basis points for GDX. And while the index has outperformed since the inception of the benchmark, the time period is quite small and it doesn’t seem prudent to draw too much from that solid performance just yet.
In terms of the portfolio, SGDM has a definite focus on large caps as these account for roughly two-thirds of the total. Still, the average weighted average market cap is around $8.7 billion, and mid caps do make up roughly 25% of the portfolio.
In terms of country exposure, Canada takes the lion’s share at 75%, though the UK does receive 15.5% while the U.S. and South Africa round out the fund. In terms of stocks, Franco-Nevada (FNV - Snapshot Report) , Randgold Resources (GOLD - Snapshot Report) , and Goldcorp (GG - Analyst Report) , all receive more than 13.6% of the assets, but are the only three that have more than 5.5% of the total, suggesting a decent level of concentration.
Can It Succeed?
The gold mining space is pretty crowded, and new funds have had difficulty in breaking in and unseating GDX which has grown into a behemoth in the space. Others have made a decent niche though, especially if they have some differentiating factors (see the Guide to Gold ETF Investing).
That appears to be the case for the new Sprott product, especially as more ‘smart beta’ funds hit the market across the ETF space. However, the fund will still have to prove itself against its more entrenched competitors, so some solid performance will definitely be necessary before this new ETF can even think about matching the asset levels in some of its main competitors in the gold mining ETF world.
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Disclosure: Zacks Index Services provides the benchmark for SGDM.