So far gold ETFs have had a better run in 2014 compared with a dismal 2013. Net ETF outflows in gold were a meager 42.5 tons in the first half of 2014, a marked improvement from the 579 tons witnessed in the year-ago comparable period. Last year, gold ETFs had suffered massive outflows as the slump in prices tarnished its image as a safe haven, thereby affecting demand for gold ETFs.
In the first quarter this year, tensions in Ukraine, bleak U.S. growth data in winter and concerns over the global economy made investors flock around gold as a risk diversifier, which resulted in positive monthly inflows to ETFs in February, for the first time in over a year. In the second quarter, the momentum continued with an outflow of only 40 tons. The bulk of the quarter's outflows occurred in April, diminishing in May before turning to a marginal inflow in June. Inflows continued in July, at around 9 tons aided by mounting tensions over Ukraine and Gaza. (Read: 3 ETFs in focus on escalating Russia/Ukraine Tensions )
After hovering on both sides of $1,300 through the year, gold prices remained steadfastly under the $1300 range in September. As the dollar rose to four-year highs against a basket of currencies and stock markets strengthened, gold prices fell to a nine-month low of $1,207 per ounce on Sep 25. However, gold rebounded sharply from the nine-month low as sell-off in U.S. equities prompted investors to buy bullion as a mode of security.
Stronger dollar a threat, India and China Hold the Key
However, these gains might not be long lasting. As the U.S. economy continues to improve, dollar will rally, which is not conducive for gold. Nonetheless, gold will eventually bounce back from the lows as buying in Asia traditionally increases during this time of the year. Top bullion consumer, China has been importing more gold in September to meet the demand from retailers, stocking up for the upcoming National Day holiday. India, the second-largest consumer will also follow suit with the upcoming festival and wedding season. Recent official trade data shows a 176% rise in gold imports in India during August. Even though strength in the U.S. and European equity markets will distract gold investors, gold prices will get a solid thrust from retail demand for gold, particularly in India and China.
Moreover, production pullbacks in response to lower gold prices last year and mining development delays can lead to a supply crunch. If so, gold prices will be pushed higher. Moreover, geopolitical tensions will spur safe-haven buying. (Read: Palladium hits 13 year high; time to buy PALL ETF? )
ETFs to Tap the Sector
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. (See all materials ETFs here )
Market Vectors Gold Miners ETF ( GDX)
GDX is one of the popular gold ETFs on the market today with asset under management of $7.97 billion and a trading volume of roughly 22,904,542 shares a day. The fund charges an expense ratio of 53 basis points a year with a dividend yield of 0.87%.
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, which holds 40 stocks in its basket, has invested 66.3% of the asset base in the top 10 holdings.
Among individual holdings, top stocks in the ETF include Goldcorp Inc. (GG), Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM), with asset allocation of 13.57%, 12.61% and 8.37%, respectively.
Market 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 their revenues from gold and/or silver mining. The product has $2.66 billion in assets with a daily volume of 4,051,626 shares. It charges 57 basis points in annual fees.
The fund has a total holding of 62 stocks with none of the companies holding more than 4.42% of assets. China Gold International Resources Corp Ltd (CGG.TO), Torex Gold Resources Inc (TXG.TO) and SEMAFO Inc. (SMF.TO), occupy the top three positions in the fund with asset allocation of 4.42%, 4.36% and 3.84%, respectively.
Global X Gold Explorers ETF ( GLDX )
The fund seeks to match the performance and yield of the Solactive Global Gold Explorers Index, which tracks companies actively involved in gold exploration. Formed in Nov 2010, the ETF now manages assets worth $48.85 million. With a daily volume of 37,766 shares per day, the fund charges 65 bps in annual fees.
It is spread across 25 small cap securities with the top 10 holdings comprising 56.6% of assets. Torex Gold Resources Inc, Newstrike Capital Inc. and Paramount Gold and Silver Corp. (PZG) command the top three positions in the basket representing 6.56%, 6.21% and 5.97% of net assets respectively.
iShares MSCI Global Gold Miners ( 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 $70.98 million in AUM and a daily volume of about 55.898 shares, while it is also a low-cost pick with expense ratio of 39 basis points a year. It has a dividend yield of 0.88%.
The fund debuted in Jan 2012 and currently has 37 companies in its basket, with the top 10 holding 70% of the assets. The top stocks include Goldcorp, Barrick Gold Corporation and Newmont with asset allocation of 16.1%, 14.9% and 9.2%, respectively.
PowerShares Global Gold & Prec Metals ( PSAU )
PSAU was launched in Sep 2008 and has been designed to track the NASDAQ OMX Global Gold & Precious Metals Index. It has a trading volume of just 8,969 shares a day, but is a bit pricey as it charges investors 75 basis points on an annual basis. The fund fetches a dividend yield of 0.27%.
This fund has a total holding of 68 stocks. Among individual holdings, Goldcorp, Barrick Gold and Newmont occupy the top three positions with an asset share of 8.09%, 8.01% and 7.78%, respectively.
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