Markets

How Well will Gold Mining ETFs Weather a Rate Hike?

In the third quarter of 2015, gold demand for investment purposes - bars, coins and ETFs - increased 27% year on year to 229.7 tons, the highest third-quarter total since 2012. Overall, in the quarter, ETFs witnessed an outflow of 65.9 tons. However, breaking down on a monthly basis, outflows of 71.8 tons in July were partly offset by inflows in the two successive months. Till October, ETFs witnessed an inflow on positive institutional investor attitudes.

Compared to the previous year, longer-term outflows from ETFs have slowed down considerably. Till this October, ETF holdings were down by just 54 tons compared with declines of 780 tons in 2013 and 133 tons in 2014. (Read: How to short Gold and Silver with ETFs )

However, at present, gold bullion and related exchange traded funds are stuck in a rut, with the precious metal trading around six-year lows amid speculation the Federal Reserve is preparing to raise interest rates, which has pushed the dollar higher. Higher interest rates would diminish gold's attractiveness as the precious metal does not pay interest like fixed-income assets.

Federal Reserve Chair Janet Yellen's speech on Dec 2 signaled that the Fed is set to raise interest rates this month for the first time in nearly a decade. So far this year, the economy has added a healthy average of 206,000 jobs a month and the unemployment rate has fallen to a near-normal 5%. Though job growth weakened to 145,000 in August and September, Yellen stated that a strong 271,000 in October lifted the monthly average since June to a vigorous 195,000.

Early on that day, Automatic Data Processing estimated that the private sector added 217,000 jobs in November. This instills optimism regarding a strong November U.S. jobs report from the Labor Department. This will be an indicator of whether the Fed will make the move at its next meeting on December 15-16. Yellen added that the Fed will also consider additional reports over the next two weeks. (Read: Precious Metals Mining ETFs Head to Head )

Moreover, expectations for soft near-term demand at a time of the year when gold demand is seasonally strong makes matters worse for gold ETFs. Thanksgiving trading was light this year as customers abstained from buying gold. In India, gold buying in the key December quarter is likely to fall to the lowest level in eight years, hurt by poor investment demand. The first back-to-back shortfall in India's monsoon rains in three decades has affected the country's rural population. On top of it, the worst deluge in a century in the southern state of Chennai, which is a major Indian market for gold, is threatening to further hurt demand.

Impending interest rate increases and a stronger U.S. dollar will keep gold prices under pressure. Moreover, retail demand is also low at the moment in India and China, the main consumers of the yellow metal. Going forward, we believe that growth in supply from mining projects will slow down as the supply pipeline thins. Lower gold prices compared with previous years and cost pressures have restricted the ability of gold producers to invest in developing new projects in recent years. Given the dearth in new projects, mine production will slow down in the next couple of years. This could eventually lead to a supply crunch that would support prices.

Risk-tolerant investors can consider investing in gold mining ETFs on their dips with a long-term view.

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.

Market Vectors Gold Miners ETF (GDX)

GDX has assets under management of $4.54 billion and a trading volume of roughly 46,713,243 shares a day. The fund charges an expense ratio of 53 basis points a year with a dividend yield of 0.90%.

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 36 stocks in its basket, has invested 54% of the asset base in the top 10 holdings.

Among individual holdings, top stocks in the ETF include Goldcorp Inc. (GG), Newmont Mining Corporation (NEM) and Barrick Gold Corporation (ABX) with asset allocation of 7.08%, 6.84% and 6.22%, 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 $1.27 billion in assets with a daily volume of 7,161,099 shares. It charges 55 basis points in annual fees with an annual dividend yield of 0.95%.

The fund has a total holding of 55 stocks with none of the companies holding more than 5.08% of assets. OceanaGold Corporation (OGC.TO), Pan American Silver Corp. (PAAS) and Northern Star Resources Limited (NST.AX) occupy the top three positions in the fund with asset allocation of 5.08%, 5.05% and 5.03%, 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 November 2010, the ETF now manages assets worth $29.09 million. With a daily volume of 139,022 shares per day, the fund charges 65 bps in annual fees and has a dividend yield of 0.15%.

It is spread across 23 small-cap securities with the top 10 holdings comprising 66.2% of assets. First Mining Finance Corp. (FFMGF), OceanaGold Corporation and Seabridge Gold, Inc. (SA) command the top three positions in the basket representing 12.34%, 7.89% and 7.86% 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 $48.84 million in AUM and a daily volume of about 74,400 shares. It is also a low-cost pick with an expense ratio of 39 basis points a year. It has a dividend yield of 1.15%.

The fund debuted in January 2012 and currently has 49 companies in its basket, with the top 10 holding 62% of the assets. The top stocks include Goldcorp, Newmont and Barrick Gold Corporation with asset allocation of 10.83%, 10.26% and 8.95%, respectively.

PowerShares Global Gold & Prec Mtls 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 $17.47 million in AUM and a daily volume of about 5,758 shares. It is a bit pricey, charging investors 75 basis points on an annual basis. The fund fetches a dividend yield of 0.84%.

This fund has a total holding of 47 stocks with the top 10 holding 57.4% of the assets. Among individual holdings, Barrick Gold, Newmont Mining and Franco-Nevada Corporation (FNV) occupy the top three positions with an asset share of 8.85%, 8.78% and 7.63%, respectively.

Sprott Gold Miners ETF ( SGDM )

Launched in July 2014, SGDM is the latest entrant in the space. It 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 $123.86 million in AUM and an average trading volume of about 265,793 shares. It charges 57 basis points in annual expense and has a dividend yield of 0.36%.

The fund currently holds 26 stocks. Among individual holdings, Agnico Eagle Mines Limited (AEM) (14.88%), Goldcorp (14.66%) and Franco-Nevada Corporation (14.58%) 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 $24.3 million in AUM and a daily volume of about 5,283 shares. It charges investors 57 basis points on an annual basis.

This fund has a total holding of 36 stocks with the top 10 holding 60.2% of the assets. Among individual holdings, Detour Gold Corporation (DGC.TO), Tahoe Resources Inc. (TAHO) and Yamana Gold, Inc. (AUY) occupy the top three positions with an asset share of 8.8%, 8.29% and 7.26%, respectively.

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MKT VEC-GOLD MI (GDX): ETF Research Reports

MKT VEC-JR GOLD (GDXJ): ETF Research Reports

GLBL-X GOLD EXP (GLDX): ETF Research Reports

ISHARS-M GL GLD (RING): ETF Research Reports

SPROTT-GOLD MNR (SGDM): ETF Research Reports

SPROTT-JR GLD M (SGDJ): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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