Gold Mining ETFs Rebound, But Can It Last?

After losing as much as 50% of their value in the first half of 2013, gold miners have seen some respite in recent weeks on rising gold prices. Gold has rallied from just about $1,250/oz. to its current level above $1,350/oz., suggesting strong sentiment in the space.

This increase is also being felt in the ETF space with key products like the SPDR Gold Trust ETF, (GLD), the iShares Gold Trust Fund (IAU) and the ETFS Physical Swiss Gold Shares Fund (SGOL) adding as well in recent sessions. While these performances have been good, events have been even better in the gold mining ETF space.

Usually, gold miners trade as a leveraged play on underlying precious metals. This means that when gold prices are rising, gold miners see even bigger gains, as they tend to experience more gains than their bullion cousins. As such, the gold miner ETFs outpaced the ultra-popular GLD and broad market funds like SPY by wide margins over the past few trading sessions.

Behind The Surge

Gold mining funds have been gathering steam as more sluggish economic data has come in. Data points such as weak consumer confidence, uncertainty on the manufacturing front, and a low level of job creation have all hit the market in the past week.

This news has suggested to many investors that the Fed will not be able to engage in tapering of QE any time soon. And if that is the case it is undoubtedly good for both gold (and other hard assets) and stocks.

Plus, since gold miners combine the both equities and precious metal exposure, they stand to be some of the best beneficiaries from this situation.

As such, the mining stocks are attractively valued at current levels, compelling investors to trend back into this space, building positions in the unloved stocks.

Gold Mining ETF in Focus

With this backdrop, we have highlighted three of the most popular choices in the space, any of which could be interesting picks for investors seeking to get in on the sector’s sudden upswing:

Global X Gold Explorers ETF (GLDX)

This is by far one of the most speculative plays in the mining space and tracks the Solactive Global Gold Explorers index. The ETF is widely spread across 20 small cap securities with none of them holding more than 9% of assets.

In terms of country exposure, Canada takes the top spot with 87% share, followed by Australia, the U.S., and the UK. The ETF has managed assets worth $31 million so far this year while volume is light. The fund charges 65 bps in fees a year from investors.

The product is up 11.3% in the past week, a pretty solid figure considering GLD added 2.8% in the same time frame.

Market Vectors Gold Mining ETF (GDX)

This is the most popular gold miner ETF on the market, with close to $7.8 billion under management. Volume is also quite good, coming in at more than 34 million shares a day suggesting that it is a pretty heavily traded product.

The fund tracks the Amex Gold Miners Index with a large cap focus, holding 37 companies in its basket in total. Canadian firms account for roughly 60% of the assets, followed by the U.S. and South Africa to round out the top three.

The product has some concentration issues though, as it allocates nearly 30% of its assets to the three biggest holdings. These include two Canada based firms – Goldcorp (GG), Barrick Gold (ABX) – and one U.S. company – Newmont Mining (NEM).

This is the most stable of the three on the list, but it still did quite well on the week, adding 7.9% in the time frame.

Market Vectors Junior Gold Miners ETF (GDXJ)

This ETF is also relatively popular, with AUM of $1.45 billion and average daily volume of just over one million shares a day. It follows the Market Vectors Global Junior Gold Miners Index, and is roughly evenly split between small and micro cap securities, holding about 68 securities in its portfolio.

Once again, Canadian firms take the lion’s share, though Australia (20.5%) and the U.S. (9.1%), round out the top three. This ETF is also much more spread out than its counterpart, allocating no more than 4.8% to any single security.

GDXJ was actually the best performer for the week, as it gained 12.3% as investors embraced the bullish trend in the gold mining ETF space.


Bottom Line

The three products above have all been beaten down in the YTD time frame. However, they have had trouble falling lower than their current level, suggesting there might finally be a bottom here.

This could be especially true when investors consider that the Fed appears unlikely to start a QE taper in the near term. And with the likely prospect of Janet Yellen as the next Fed Chair, a taper could take quite some time, suggesting there is at least some hope for this short term run to continue in gold mining ETFs.

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