Thoughts On The New Gold Miners ETF

Interest in gold as a holding within long-term, buy-and-hold portfolios has skyrocketed in recent years, thanks to both the rapid price appreciation of the yellow metal as well as developments in the ETF industry that have made this asset class more accessible than ever before. In addition to physically-backed gold ETFs such as IAU and GLD–which have about $80 billion in assets between them–investors have embraced “indirect” exposure to gold miners through stocks of companies that discover, extract, and sell the precious metal. Because the profitability of these companies depends on the prevailing market price for the assets they sell, these stocks should tend to move in unison with spot gold prices–at least over the long run.

The Market Vectors Gold Miners ETF (GDX) has grown to become one of the largest equity ETFs in the world, accumulating close to $10 billion in assets. Competing or similar products have popped up over the years, including the Global X Pure Gold Miners ETF (GGGG) and PowerShares Global Gold and Precious Metals Portfolio (PSAU). Now iShares has thrown its hat into the gold mining ring, recently rolling out its MSCI Global Gold Miners Fund (RING). This ETF, which debuted last week, seems to be a direct competitor with GDX; iShares is no doubt hoping to attract some of the billions of dollars that the established Van Eck fund has accumulated.

The new ETF certainly has a nice ring to it, but it takes a lot more than a name to make a compelling product. Below, we highlight three aspects of RING that stand out, and offer an opinion on where this ETF stands relative to its competition:

1. Expenses

iShares has seen its market share erode in recent years by products that are more competitive from a cost perspective. Now the company is leading the price war in the industry, recently launching several ETFs that are cheaper than their more established competitors. That is certainly true for RING, which has an expense ratio of just 0.39%. That’s about half of what PSAU (0.75%) charges, and considerably less than the 53 basis points for GDX. For investors looking to maximize cost efficiency, RING certainly has the edge in this regard.

2. Focus On Hedging

It has been noted recently that many gold miner ETFs have not kept track with spot gold prices; mining stocks have lagged far behind the underlying metal in recent months. The explanation for this phenomenon is rather simple; many gold miners hedge their gold exposure, locking in prices at which they will sell their products far in advance. So a jump in gold prices certainly doesn’t hurt, but it isn’t as beneficial as it may seem to those who have elected to hedge.

iShares notes that the index underlying RING notes that “the index screens include companies that do not hedge their exposure to gold prices.” And the top holdings of RING include several rather large miners that do not engage in hedging of their gold assets, a feature that might be desirable to investors looking to achieve higher correlations with spot gold prices. Some components of RING do engage in hedging practices to take some risk off the table, but the general tilt towards stocks whose hedgebooks are limited is an interesting aspect of this fund.

3. Pure Play?

Though RING is described as a gold miners ETF, it is important to note that the exposure achieved actually includes a number of other metals as well. Though gold accounts for a significant portion of the operations of the underlying companies, the holdings of this ETF also mine silver, copper, and various other precious and industrial metals whose prices do not always move in lock step with gold bullion. Barrick, the largest individual holding, produced more than 360 million pounds of copper in 2010.

The vast majority of revenues derived by the components of RING come from gold, but the impact of other operations should certainly be considered when establishing a position. For investors looking to isolate gold exposure, the Global X Gold Pure Miners ETF (GGGG) is one option out there.

There is certainly a lot to like about RING, especially the extreme cost efficiency offered and focus on companies that have removed their gold hedges. Though GDX has it beat in terms of liquidity, don’t be surprised if this new ETF slowly steals market share.

Disclosure: No positions at time of writing.