The mining sector encompasses the extraction (mining) as well
as primary and secondary processing of metals and minerals. It
includes producers of aluminum, gold, steel, precious metals and
minerals, and diversified metals and minerals. The sector is
highly cyclical and extremely competitive.
Though industrial mining is back on track after a decade given
strong growth in emerging markets, in particular China and India,
shaky domestic growth, still depressed job numbers and unresolved
European problems keep the performance in check (read:
Two ETFs for the Muddle Through Economy
The demand for most metals is increasing rapidly, but the
supply is limited due to a lack of investments in new mines over
the last few years. The mining companies are now making huge
investments to bolster their supply chains. These companies are
looking for exploration of new mines with all the necessary
However, in the rising energy and raw material costs
environment, increasing productivity and reducing costs are the
two keys to success for these companies (read:
Could This Be The Year For These Mining ETFs?
Given the cyclical nature of the metals industry, low-volume
high-cost producers need to generate sufficient cash or ensure a
strong borrowing position during market peaks to survive the
market troughs. In this regard, consolidation or mergers and
acquisitions (M&A) is considered the best way to keep the
input cost low and obtain synergies and economies of scale.
A drop in commodity prices and lingering economic conditions
has however resulted in lower M&A activity in the first half
of the year. Instead, expansion in low-cost countries will ensure
lower labor costs and help tap their growth potential. Overall,
mining companies are expected to benefit from lower production
cost and increasing supply once the market booms.
For investors seeking to play in this sector, there are
currently four mining ETFs targeting different industrial metals
in basket form. Though these ETFs have underperformed the broad
market, recent simulative measures by Fed have raised the
prospects of potential upside (read:
Commodity ETFs in Focus as Fed Unleashes QE3
). These often act as a leveraged play on the underlying metals,
making them excellent picks in bull market environments:
SPDR S&P Metals and Mining ETF (
Investors seeking domestic exposure could find XME a good
choice to play. It is the largest and most popular fund in the
metals and mining space with AUM of $996.3 million. The fund
seeks to replicate the performance of the S&P Metals and
Mining Select Industry Index, before fees and expenses.
The fund holds 41 securities in the basket, with large focus
on small cap stocks. It enjoys diversification benefits, as it
puts only 33.6% of assets in the top 10 holdings with weighting
of around 3% each. Compass Minerals International (
), Hecla Mining (
) and Royal Gold (
) are the top three elements in the basket (read:
Three ETFs with Incredible Diversification
From various commodities perspective, the product is heavily
weighted towards steel with 34% share, followed by diversified
metals and mining (23%), precious metals (21%), coal and
consumable fuels (15%) and aluminum (7%).
Launched in June 2006, the ETF is the low cost choice in the
space, charging 35 bps in fees per year. It trades in good
volumes of more than 3.4 million shares per day, suggesting
little in extra cost in the form of bid/ask spreads.
iShares MSCI Global Select Metals & Mining
Producers Fund (
Launched in January 2012, this fund provides exposure to both
developed and emerging metals and mining markets. The ETF seeks
to match the price and yield of the MSCI ACWI Select Metals &
Mining Producers Ex Gold & Silver Investable Market Index,
before fees and expenses.
The fund largely focuses on large cap companies that are
involved in the extraction and production of diversified metals,
aluminum, steel, and precious metals and minerals excluding gold
It allocates nearly 51% of the assets in the top 10 firms,
with a 12.3% share in BHP Billiton Limited (
) followed by a 7.4% share in BHP Billiton plc (
) and 7% in Rio Tinto (
). This suggests that company-specific risk is somewhat high in
the case of PICK, as the top 10 holdings dominate half of the
returns. In total, the fund holds 296 securities.
The product has a definite tilt towards broad metals and
mining as these make up for 64% of the assets. Other more
specific metals - steel, precious metals and aluminum - make up
for the remaining portion of the basket.
The fund is widely diversified across various countries, as UK
takes the top spot followed by Australian and American
securities. These three nations make up for nearly 52% of the
assets (see more in the
Though the product is quite inexpensive charging 39 bps in
annual fees, a wide bid/ask spread could raise the total cost of
the fund. PICK trades in small volumes of 36,000 shares per day
managing to attract assets of $218.3 million thanks to the
newness of the product.
EGShares Emerging Markets Metals & Mining ETF
Investors looking for emerging market exposure in the space
can find EMT an exciting pick. The fund offers non-U.S. dollar
commodity exposure to the largest miners of copper, nickel,
platinum, palladium, iron ore, and coal in the emerging
The product often benefits from the emerging market currency
appreciation, such as the Brazilian real, South African rand and
Russian ruble, versus the U.S. dollar.
The fund tracks the Dow Jones Emerging Markets Metals &
Mining Titans 30 Index, holding 30 securities in the basket. It
is highly concentrated in the top 10 firms, as it allocates no
less than 58% of its assets to them.
) enjoys the top position with at least 10% share while MMC
Norilsk Nickel and AngloGold Ashanti (
) take the next two spots in the basket with a combined share of
nearly 14%. While large caps account for a substantial 78% of the
assets, mid-caps take the remaining portion of the
The fund has a slight tilt towards steel followed by precious
metal, metals and mining, coal and alternative energy, and
aluminum. From a country perspective, South African companies
occupy the largest share in the basket with around 23%.
Brazilian, Chinese, Russian, Indian, Mexican, Polish and Chilean
companies make up the remaining portion of the basket.
The fund charges higher fees of 85 bps per year. With volume
of only 5,000 shares per day, the wide bid/ask spread increases
the cost for the product. Launched in May 2009, the product so
far managed assets of $10 million, although it does pay out a
solid yield making it a potential income destination for
Top Three Emerging Market Dividend ETFs For
Income And Growth
Global X Junior Miners ETF (
This is the newest product in the space, initiated by Global X
in September 2012 (read:
Global X Debuts Junior Miners ETF (JUNR)
). The ETF looks to give broad exposure to small cap firms in the
mining world from across the globe. The fund seeks to match the
performance of the Solactive Global Junior Miners Index, which is
a benchmark of small cap mining firms that are engaged in
producing, smelting or refining of coal, copper, gold, iron,
nickel, silver, titanium.
The product holds 97 securities in the basket and is highly
diversified across individual securities, sectors and countries.
The top 10 holdings account for nearly 22% of the assets, with
none of the securities holding more than 3% share. Precious
metals enjoy the top position in the basket comprising roughly
three-fifths of the assets (read:
Precious Metals ETFs 101
). The rest goes to broad metals and minerals, coal and
alternative energy, steel, and aluminum.
In terms of a national breakdown, Canada and Australia take
the top two spots at 34% and 26% of assets, respectively. The
U.S. (18.4%), the UK (7.3%) and China (4.3%) round out the top
five, suggesting that a host of nations from around the globe
receive sizable chunks in the portfolio.
Thanks to the newness of the product, it trades in small
volumes of nearly 8,800 shares per day. This illiquid nature
raises the cost for this fund in the form of a wide bid/ask
spread beyond the expense ratio of 0.69%. The ETF has, however,
delivered solid returns and an above-market dividend, making it a
decent choice in the space.
Provided below is the summary of the ETFs discussed above for
those seeking a side-by-side comparison:
AUM (in millions)
No. of Holdings
Assets In Top 10
YTD Return 12/20/12
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BHP BILLITN LTD (BHP): Free Stock Analysis
EGS EMG MKT MM (EMT): ETF Research Reports
GLBL-X JR MINER (JUNR): ETF Research Reports
ISHARS-M GL SMM (PICK): ETF Research Reports
SPDR-SP MET&MIN (XME): ETF Research
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