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What Lies Ahead for Gold Mining ETFs?

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Gold prices have been trending upward since March 16, as dollar nosedived to a fresh five-week low with the US Federal Reserve signaling at a slower pace of increase this year.

As widely expected, the Fed hiked the interest rate from a range of 0.5%–0.75% to 0.75%–1% “in view of realized and expected labor market conditions and inflation”. This marks the second rate hike since December 2016 and third in the last decade. It also indicated that the labor market has continued to strengthen and economic activity has continued to expand at a moderate pace. It is also expected that inflation will stabilize around 2% over the medium term.

The Fed hinted at two more rate hikes this year, the number lagging expectations, which hurt U.S. government bond yields as well as the dollar. Investors clearly expected a more hawkish approach from the Fed about the pace and number of rate hikes this year. (Read: Top Stories of Q1 from Wall Street)

Given that gold is not yield-producing and investors have to rely on price appreciation for returns, the yellow metal normally has a strong inverse correlation to inflation adjusted interest rates. Gold traditionally is also viewed as a hedge against inflation. Inflation in the world's largest economy increased 2.7% year over year in Feb 2017 – the highest since March 2012 – boosted by a rise in gasoline prices.

Further, the equity market, which so far enjoyed a nearly 10% gain since President Trump’s win, succumbed to growing concerns that Trump’s pro-growth policies could take longer to implement as well as the uncertainty over the future path of interest rates. This has helped boost the safe haven demand for gold. Weaker-than-expected economic data also weighed on the U.S. dollar, which boosted gold prices.

Gold prices should also find support from retail demand from top consumers, India and China. A good monsoon in India will also brighten prospects of a better harvest, which in turn is expected to boost the purchasing power of gold among farmers. (Read: Why Investors are Bailing out of US Stock ETFs)

ETFs to Tap the Sector

The rally in the commodities may have lifted the share prices of gold mining companies but investing in ETFs that track physical gold is a better way to invest in the metal. Below, we highlight the ETFs in this sector in greater detail for those seeking opportunities to make a gold-mining ETF play at this time.

VanEck Vectors Gold Miners ETF (GDX)

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 has invested 59% of the asset base in the top 10 holdings.

GDX has assets under management worth $11.47 billion. The fund charges an expense ratio of 52 basis points (bps) a year with a dividend yield of 0.26%. (Read: Are Gold ETFs Gearing Up for a Rally?)

Among individual holdings, top stocks in the ETF include Barrick Gold Corporation (ABX), Newmont Mining Corporation (NEM) and Newcrest Mining Limited (NCMGY), with asset allocation of 11.38%, 9.12% and 6.78%, respectively.

VanEck Vectors Junior Gold Miners ETF (GDXJ)

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 small- and medium-capitalization companies that generate at least 50% of revenues from gold and/or silver mining. The product has $5.19 billion in assets under management. It charges 56 bps in annual fees with an annual dividend yield of 4.15%.

The fund’s top 10 holdings comprise 41% of its asset base. Alamos Gold, Inc. (AGI), B2Gold Corp (BTG), and VanEck Vectors Gold Miners ETFs occupy the top three positions in the fund with asset allocation of 5.89%, 5.77% and 4.67%, respectively.

Global X Gold Explorers ETF (GOEX)

The fund seeks to match the performance and yield of the Solactive Global Gold Explorers & Developers Index, which tracks companies actively involved in gold exploration. Formed in November 2010, the ETF now manages assets worth $46.4 million. The fund charges 65 bps in annual fees and has a dividend yield of 33.83%.

Its top 10 holdings comprise 41% of assets. First Mining Finance Corp. (FFMGF), Torex Gold Resources (TXG.TO) and Pretium Resources Inc. (PVG) command the top three positions in the basket representing 5.46%, 5.40% and 4.87% of net assets, respectively.

iShares MSCI Global Gold Miners ETF (RING)

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 companies in both the developed and 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 $149.8 million in AUM. It is also a low-cost pick with an expense ratio of 39 bps a year. It has a dividend yield of 1.29%.

The fund debuted in January 2012 and currently the top 10 holds 68% of assets. The fund has 35 stocks in its basket and the top stocks include Barrick Gold

Corporation, Newmont Mining Corporation and Goldcorp Inc. (GG) with asset allocation of 15.84%, 12.306% and 8.79%, respectively.

PowerShares Global Gold & PrecMtls ETF (PSAU)

PSAU was launched in September 2008 and has been designed to track the NASDAQ OMX Global Gold & Precious Metals Index. The ETF has over $36.8 million in AUM. It is a bit pricey, charging investors 75 bps on an annual basis. The fund fetches a dividend yield of 1.03%.

This fund has a total holding of 62 stocks with the top 10 comprising 54.71% of assets. Among individual holdings, Barrick Gold, Goldcorp and Newmont Mining, occupy the top three positions with an asset share of 9.10%, 7.54% and 7.34%, respectively.

Sprott Gold Miners ETF (SGDM - Free Report)

Launched in July 2014, SGDM tracks the Sprott Zacks Gold Miners Index, which is a rules-based index that assigns weightings on the basis of fundamental factors such as earnings and balance sheet growth.

SGDM currently has $199.65 million in AUM. It charges 57 bps in annual expense and has a dividend yield of 0.02%.

The fund’s top 10 holdings comprise 70% of its asset base. Among individual holdings, Randgold Resources Limited (GOLD) (13.87%), Agnico Eagle Mines Limited (10.95%) and Goldcorp (10.55%) occupy the top three positions.

ALPS Sprott Junior Gold Miners ETF (SGDJ)

SGDJ seeks to deliver exposure to the Sprott Zacks Junior Gold Miners Index. This factor-based index aims to track the performance of small-capitalization gold companies whose stocks are listed on major U.S. and Canadian exchanges. The ETF has over $34.47 million in AUM and charges investors 57 bps on an annual basis with a dividend yield of 1.64%.

This fund has a total holding of 35 stocks with the top 10 holdings comprising 54% of assets. Among individual holdings, Alamos Gold, OceanaGold Corporation, IAMGOLD Corporation (IAG) occupy the top three positions with an asset share of 8.31%, 7.27% and 6.79%, respectively.

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