Can You Do Better Than GDX In The Gold Mining Space?

Commodity investors should rejoice over the recent growth in the ETF industry, as a number of new products have hit the markets in recent months offering a wide range of ways to target the commodity space. These new ETFs allow investors to slice and dice the market into very granular segments with funds targeting everything from rare earth metals to farming. This allows investors to target only the sector of the commodity world that they feel offers the best risk/return profile, resulting in exposure that can conform more closely with investment objectives.  

Despite this innovation, a vast majority of assets remain in some of the mainstays in the industry, most notably in the gold space with the Market Vectors Gold Miners ETF (GDX). The fund is a behemoth in the commodity ETF space as it has close to $7.5 billion in assets and trades roughly 15 million shares a day. Yet, even though the fund is extremely popular with investors, some are beginning to question if it is the most optimal way to gain exposure to the space [see 50 Ways To Invest In Gold]. As a result, competition has cropped up that targets junior gold miners, gold explorers, and more diversified precious metal firms as well. While these have all received a good deal of attention, it appears as though many have forgotten about another product in the space that could offer a truer picture of exposure, the Global X Pure Gold Miners ETF (GGGG).

This relatively new fund from Global X, tracks a vastly different index than its more popular counterpart, the Solactive Global Pure Gold Miners Index. This benchmark tracks the performance of the largest and most liquid gold mining companies globally. Only companies that generate the vast majority of their business from gold mining are eligible to be included in the index. The index is calculated as a total return index in US dollars and rebalanced semi-annually. The stocks are screened for liquidity and weighted according to free-float market capitalization, giving investors a basket of about 30 companies in total.

While this may sound similar to GDX, the implications of the ‘generates vast majority of their business from gold mining’ section are profound. In total, close to 95% of component securities revenues come from gold mining, ensuring that the fund is heavily correlated to gold prices and not to more industrial metals which have a very different investment outlook. This method also helps to exclude a number of large mining firms giving the product a tilt towards mid and small cap securities instead, which could increase volatility when compared to more ‘traditional’ gold ETF products in the space [read Three Reasons Why Gold is Overvalued].

Holdings

So although both GDX and GGGG track gold miners, their list of top holdings are no where close to being similar. While they both have about 30 holdings in total, GDX is far more top heavy with close to 70% of its assets in its top ten compared to just about 50% for the Global X product. Meanwhile, the list of top holdings is drastically different as well, as the two products have close to nothing in common as just Anglogold Ashanti and Kinross make up the top ten in each. In fact, GDX also includes a number of companies that actually get the majority of their revenues from metals other than gold as Silver Wheaton, Compania de Minas Buenventura, and Pan American Silver Corp combine to make up over 10% of the fund’s total assets but get less than 50% of their revenues from the yellow metal. Even more troubling is that Pan American and Compania de Minas Buenventura both get less than 5% of their revenues from gold, suggesting their performance isn’t even remotely related to gold’s outlook [see 25 Ways To Invest In Silver].

Verdict

For traders, GDX is probably still the go to product in the space; its volume and bid/ask spreads are unmatched in the commodity world. However, for longer term investors, GGGG makes for a compelling choice. The product is only slightly more expensive than the Market Vectors fund and more than makes up for this extra cost with its much more targeted holdings. It doesn’t have any firms that are primarily mining silver and it doesn’t allocate big chunks to firms that are engaged in a variety of other mining operations either. So if investors truly want targeted exposure to the gold mining sector, GGGG is probably the best way to get it [Are Gold Miners A Buy?].

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Disclosure: No positions at time of writing.